Fund Competition under Conflicting ESG Rating Methodologies

Battle Count: 59

The paper is primarily a theoretical industrial organization and portfolio management model rather than a trading strategy paper. However, it has indirect relevance: (1) understanding how ESG rating methodology disagreement affects fund flows and security selection informs ESG factor investing; (2) the portfolio geometry framework (common vs. differential directions) could inform multi-factor portfolio construction; (3) fee compression and participation effects under disagreement are relevant for fund-of-funds allocation; (4) the distinction between reported scores and holdings-based outcomes is relevant for ESG screening strategies. The paper does not propose trading signals, backtests, or algorithmic strategies.

The theoretical model involves multi-dimensional portfolio geometry (budget-neutral tangent space, orthogonal decomposition), game-theoretic equilibrium solving (two-stage subgame-perfect), and welfare decomposition. However, the core two-provider model yields closed-form solutions (Propositions 1-9). Numerical implementation requires solving quadratic optimization problems and evaluating closed-form expressions. The multiple-provider extension (Section 4) requires eigendecomposition of the methodology Gram matrix. The main complexity lies in correctly specifying the methodology geometry, verifying regime conditions (partial/full/boundary coverage), and ensuring trust-region validity. No code is provided.

The paper provides full analytical derivations, closed-form equilibrium expressions, and numerical illustrations with specified parameter values (t=1, kappa=1, m=0.8, alpha=0.5, lambda=0.3, h=0.6, nu=0.75, v=0.4, theta_u=0.8, R=0.4). However, no code repository is provided. The theoretical model is fully specified with proofs in appendices, making analytical reproduction feasible. Numerical figures are described but code is not shared.