Skill or sustainability? Deconstructing the stock-selection timing abilities of European ESG fund managers

Abstract

Driven by the rapid expansion of ESG investing and the heightened volatility recently observed in the financial landscape, we investigate the stock-selection timing abilities of ESG fund managers. We employ a novel holdings-based stock-selection timing test targeting funds operating within the leading European markets for sustainable investing – the UK, France, and Germany – spanning the period from January 1, 2012, to December 31, 2024. Bootstrap analysis reveals that 25.76% of UK funds exhibit timing abilities that cannot be attributed to luck, though positive timers remain fewer than among conventional peers. Conversely, French and German managers generally fail to time active trades successfully. Nonetheless, strategy efficacy is weakened during turbulent periods. Notably, positive timers generate significantly higher Fama-French-six-factor abnormal returns than negative timers at the short-term six-month horizon, with return spreads ranging from 2.72% to 4.68% across all regions. Timing skills correlate positively with active trading but negatively with ESG ratings. Finally, UK and German fund investors recognize adept timers, whereas French ones do not. Our results provide crucial insights for market participants, highlighting that France's strong ESG integration and government incentives may create an environment that disincentivizes active timing, leading investors to prioritize social impact over financial performance. To the best of our knowledge, this study represents the first empirical attempt to evaluate the stock-selection timing abilities of ESG fund managers within the European context.