Do ESG funds engage in portfolio pumping to gain higher flows? An application of Benford's Law

Aineas Mallios and Taylan Mavruk

International Journal of Finance & Economics, 2025, vol. 30, issue 2, 1540-1563

Abstract: Portfolio pumping is identified as an ‘illegal’ trading practice that involves inflating quarter‐ and year‐end portfolio returns. Utilizing U.S. domestic equity mutual fund daily return data, we examine whether environmental, social, and governance (ESG) funds engage in portfolio pumping to generate higher flows. Our findings reveal that, on average, ESG funds attract 0.4% higher flows than other funds. However, they engage in portfolio pumping and achieve returns that are 5.3 basis points (bps) higher at quarter ends compared to their returns during the rest of the year. This practice does not result in additional fund flows. Notably, compared to other funds, ESG funds exhibit a significant 4 bps reduction through portfolio pumping. This implies that, on the last day of the quarter, ESG funds earn approximately 4 bps lower returns compared to other funds. Portfolio pumping is costly for both investors and financial markets since it leads to trading activities that cause stock prices to deviate from their fundamental values. ESG funds engage less in portfolio pumping than other funds, which indicates that their primary focus is to maximize fund flows rather than enhance or create a positive social impact on the underlying firm portfolio. Investors seem to understand this goal, particularly when ESG funds engage in portfolio pumping and avoid investing in ESG funds.

Date: 2025
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