Mutual Funds Engage in 'Green Window Dressing' Around Disclosures

Parise and Rubin document that many sustainable mutual funds engage in ‘green window dressing’—buying sustainable assets immediately before regulatory disclosure dates and selling them afterward.

• Main finding: Using return-based measures, funds’ ESG beta rises by roughly 0.12 in the ten days before disclosure (about a 50% jump relative to earlier in the quarter) and snaps back immediately after; the pattern is sharp, recurring quarter after quarter, and absent in placebo tests and pre-rating periods.
• Mechanics & consequences: A one-standard-deviation increase in pre-disclosure ESG exposure raises the probability of receiving Morningstar’s five-globe rating by 2.1 percentage points (only 10% of funds receive the top rating); funds underperform their soon-to-be-reported portfolios before disclosure and outperform them afterward, institutional share classes attract stronger inflows, and quarterly disclosure frequency provides the opportunity for this behavior.