In mid-August, Strive Asset Management launched an anti-ESG fund, the U.S. Energy ETF (DRLL). The fund has attracted around $312 million in investments since its launch. Strive’s executive chairman, Vivek Ramaswamy, said that the fund represents a lot of “everyday citizens” who object to other asset managers’ investment decisions that ostensibly “advance social and political agendas they do not agree with,” adding, “People are voting with their feet.”

If he’s right about how people are voting, it’s not clear that they are stampeding from environmental, social, and governance investments. A newly published working paper by Florian Berg of MIT Sloan, Florian Heeb of the University of Zurich, and Julian F. Kölbel of the University of St. Gallen found that a change in a company’s MSCI ESG rating does affect the company’s holdings by ESG mutual funds, but they react slowly to the rating change.

According to the researchers, “Two years after a downgrade, ESG ownership is on average 13.1% lower; two years after an upgrade, it is 17.1% higher than one month before the rating change.” ESG funds are not meme stocks.

ESG rating changes do, however, affect shareholder returns over time. Following an ESG downgrade, returns fall by a maximum of 3.78% after 19 months. Returns after upgrades rise by a maximum of 2.62% after 22 months.

How do the companies themselves react to the ratings change? The researchers found no significant reaction to changes in the environmental and social scores. However, companies do react to both upgrades and downgrades in the governance score: “[F]ollowing a downgrade, firms improve their governance practices; following an upgrade, firms tend to let their governance practices deteriorate.”

In the end, the authors say, the economic impact of ESG investing appears to be limited. There is no significant difference in the cost of capital to a greener firm and no evidence that there is a boost allowing greener firms to grow faster than their less-green peers. What does affect a company is the persistent effect of a rating change (up or down) on the share price, “arguably an important condition for knock-on effects on firms’ capital expenditure or efforts to reform ESG practices.”

Even though the holdings of ESG mutual funds do react to changes in ESG ratings, the authors conclude that while the changes have an effect on financial markets, the impact of these changes “on the real economy is barely detectable, at least so far.”

Why, then, do investors pay attention to rating agencies, proxy advisors, and fund managers who continue to promote ESG funds? One reason might be that many private investors own sustainable funds because they are more interested in signaling their personal preferences than in making money, a so-called warm glow.

In another research report published in July, researchers wanted to know if investors’ willingness to pay for investments that have environmental and social impact corresponds to the actual impact those investments have. Co-authored by Heeb, Kölbel, and two other collaborators, this second study challenges current assumptions baked into economists’ models suggesting that pro-social investors influence asset prices either because they prefer to invest in sustainable assets or because they want to give companies an incentive to reduce their negative effects on the environment.

It turns out that investors do care about the positive impact of sustainable investments but don’t care much at all about the magnitude of that impact. There is no significant difference in investors’ willingness to invest in a company that reduces its carbon emissions by half a ton and another that reduces its emission by 5 tons. How investors value the impact of their investments, the study notes, “is mainly driven by feelings rather than by calculation.”

And if that is the case, then investor behavior may be the result of the structure of the ESG investment industry and the way the industry markets its products to potential investors. The authors conclude, “Without measures in place that align the experience of warm glow with a product’s underlying impact, sustainable investing may turn out to be a much less effective mechanism than previously thought for curbing externalities.”

Neither paper comes right out and states what may be obvious: many people want to put their money into ESG funds because it makes them feel good and because they believe it helps combat climate change and other inequities.

According to The Corporate Citizenship Project, a corporate governance think-tank, it is precisely that structure that allows proxy advisors such as ISS and ESG ratings agencies to avoid accountability for their ESG ratings.

“Most socially-conscious investors are unfortunately content to put their money in a fund labeled ‘ESG’ or ‘Social Impact’ with no affirmative assurances that the funds are being invested in accordance with those values. It is the lack of investor push-back that has allowed proxy advisors like ISS and other ratings agencies to build a conflict-of-interest ridden ESG ratings system that does not appear to be correlated with social impact. Our organization hopes to educate investors on how to scrutinize fund managers about how they define ESG,” said Bryan Junus, Chief Analyst for The Corporate Citizenship Project.

Ramaswamy claims that some investors object to investing in funds that “advance social and political agenda” they don’t believe in. These investors can now invest in DRLL or similar funds that advance different social and political agendas.

That is not the same thing as having unhappy ESG investors racing for the exits. Committed ESG investors are, almost by definition, investing for the long haul, and they appear to be willing to wait. The trick is going to be getting rating agencies, proxy advisors, and fund managers to give investors solid information on which to make investment decisions.

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