In our paper Green Window Dressing, we document a striking and largely hidden pattern in how sustainable mutual funds manage their portfolios around disclosure deadlines. Although ESG investing is marketed as a long-term commitment to responsible asset allocation, we show that many funds behave quite differently: they acquire sustainable assets just before regulatory filings and unwind these positions as soon as investors stop looking. This strategic reshuffling—what we call green window dressing—artificially inflates sustainability ratings while allowing managers to hold more profitable but less sustainable portfolios during the rest of the quarter.

The practice is subtle, hard to detect directly, and entirely driven by the structure of regulatory disclosure. Mutual funds report their performance daily, but they disclose their portfolio holdings only a few times times per year. Sustainability ratings—such as Morningstar’s influential Globe Ratings—depend almost entirely on those snapshots. The incentives are therefore clear: being green matters only on the handful of days when the portfolio becomes visible. Being profitable matters every day.

The tension between financial returns and sustainability has been widely documented. Imposing an ESG constraint on portfolio optimization reduces the set of eligible assets, limits diversification, and can entail a performance cost. Fund managers, however, operate in a highly competitive environment in which underperformance translates quickly into redemptions and lost fees. In this setting, it is not particularly surprising that some may try to satisfy both goals—responsibility and returns—not simultaneously, but sequentially.

Our contribution is to show that this is not a theoretical concern. It is a measurable, systematic pattern in the data.

Strategic Changes in ESG Exposure

Because funds disclose their holdings infrequently, we cannot simply observe whether they buy or sell sustainable stocks on particular days. Instead, we turn to return-based measures of portfolio exposure. If a fund buys ESG stocks before disclosure, its daily returns should become more correlated with an ESG index; if it sells those positions afterward, that correlation should fall.

This is precisely what we find. In the ten days leading up to disclosure dates, the ESG beta of the average sustainable fund rises by roughly 0.12—almost a 50 percent jump relative to earlier in the quarter. Immediately afterward, the beta snaps back to its previous level. The change is sharp, recurring quarter after quarter, and entirely absent in placebo tests. We find no similar pattern when we assign random disclosure dates, when we examine periods before the introduction of Morningstar’s sustainability ratings, or when we analyze ESG index funds whose strategies are mechanically tied to benchmarks. The only setting in which we observe this distinctive “up before, down after” pattern is precisely where disclosure incentives matter most: in actively managed ESG funds.

This pattern reveals something important. It is not that some funds happen to drift in and out of sustainable stocks. They move strategically, predictably, and in lockstep with the regulatory calendar.

Disclosed Portfolios versus Realized Portfolios

To further explore this behavior, we compare a fund’s real-world returns to the returns it would have earned had it passively held the portfolio it reports at the end of each quarter. This comparison is revealing. Just before disclosure, funds underperform their soon-to-be-reported portfolios. Trading into ESG stocks appears to come at a cost—one consistent with higher transaction costs and the price pressure associated with many funds buying the same assets at the same time.

Once disclosure passes, the pattern reverses. Funds begin to outperform the portfolios they have just reported, suggesting that they rotate out of high-ESG but lower-expected-return assets into stocks with higher payoffs. Crucially, we show that these realized portfolios exhibit much lower ESG exposure than the portfolios disclosed to the regulator. The difference between “what funds say they hold” and “what they actually hold” widens almost immediately after disclosure day.

This divergence helps to explain an otherwise puzzling observation in the literature: sustainable funds do not underperform their unconstrained peers as much as theory suggests they should. If sustainable funds hold green assets only when someone is watching—and less sustainable, higher-yielding assets when no one is—then muted underperformance follows naturally.

Why Engage in Green Window Dressing?

Having documented the behavior, we turn to its economic rationale.

The first is the effect on sustainability ratings. We find that a one-standard-deviation increase in pre-disclosure ESG exposure increases the probability of receiving Morningstar’s coveted five-globe rating by 2.1 percentage points. Given that only ten percent of funds receive the top rating, this is a meaningful jump. Funds that look greener at the right moment climb the sustainability ladder; funds that do not fall behind.

The second incentive is performance. By temporarily unloading ESG assets after disclosure, funds free themselves—at least until the next quarter-end—from the ESG constraint. They can earn higher expected returns by reallocating toward profitable but lower-rated assets. In practice, window dressers end up holding portfolios that closely resemble the market for most of the quarter.

The third incentive is investor flows, which are highly responsive to both ratings and performance. We find that funds engaging in the strongest green window dressing attract significantly higher inflows in the months following disclosure. The effect is substantially stronger for institutional share classes. This pattern is consistent with what we call “delegated window dressing”: institutions seeking to meet ESG mandates appear particularly eager to allocate to funds that look green on paper while earning market-like returns in practice.

Interestingly, we also find that funds aimed primarily at retail investors are less likely to window dress. Retail investors care about sustainability but appear less sensitive to short-term performance, reducing managers’ incentives to push the boundaries of their ESG mandate. The sophisticated, mandate-constrained institutional investor is, paradoxically, the one most likely to be catered to through strategic green reshuffling.

Implications for ESG Regulation and Governance

The broader implications of these findings are significant. ESG investing relies on transparency, trust, and the belief that labels meaningfully reflect underlying asset exposures. But when disclosure rules allow managers to appear green only when it counts, sustainability ratings become easy to manipulate. Investors who rely on those ratings may be misled about the true environmental footprint of the funds they choose.

For regulators, our results suggest that disclosure frequency matters. Quarterly snapshots provide room for strategic behavior. For rating agencies, the message is similar: any rating system that depends heavily on infrequent, predictable disclosures is susceptible to window dressing. Incorporating higher-frequency data, or return-based diagnostics, may substantially improve the robustness of sustainability assessments.

For institutional investors, the takeaway is more subtle but equally important. Many of the apparent “best-in-class” ESG funds may be green only at the surface—and especially during the only days when the world looks closely.