Do ESG-conscious fund managers drive green innovation? An LLM-based textual analysis of fund manager narratives

As ESG considerations gain increasing prominence, investors’ preferences for ESG factors are evolving, potentially influencing corporate governance practices. This study examines how fund managers’ ESG preferences affect the green innovation efforts of the firms they hold. Using large language models (LLMs) to analyze fund managers’ discussions in the quarterly reports of China's mutual funds, we find that firms held by fund managers with stronger ESG preferences tend to demonstrate better green innovation performance. The positive impact of ESG-conscious fund managers on green innovation is primarily driven by increased R&D expenditures, the hiring of additional R&D personnel, and the alleviation of financing constraints. Additionally, the strength of this effect varies with factors such as analyst coverage, environmental performance, corporate governance structures of the firms, and the consistency of fund managers’ ESG preferences. This research not only highlights the utility of LLMs in corporate finance studies but also offers valuable insights into the role of fund managers’ personal preferences in shaping corporate governance and innovation strategies.