Abstract

Examining a shock to the salience of the sustainability of the U.S. mutual fund market, we present causal evidence that investors marketwide value sustainability: being categorized as low sustainability resulted in net outflows of more than $12 billion while being categorized as high sustainability led to net inflows of more than $24 billion. Experimental evidence suggests that sustainability is viewed as positively predicting future performance, but we do not find evidence that high-sustainability funds outperform low-sustainability funds. The evidence is consistent with positive affect influencing expectations of sustainable fund performance and nonpecuniary motives influencing investment decisions.

Scientific Portfolio AI- Generated Summary

In their paper “Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows,” the authors examine whether investors value sustainability by analyzing ranking and fund flows. The authors use a natural experiment in which Morningstar, a leading investment research firm, introduced a sustainability rating for mutual funds in 2016. The rating is based on environmental, social, and governance (ESG) factors and ranges from one to five globes, with five being the highest rating. The authors analyze the fund flows and rankings of mutual funds before and after the introduction of the sustainability rating to determine whether investors changed their behavior in response to the new information.

The authors find that investors do value sustainability, as mutual funds with higher sustainability ratings experienced higher inflows and better rankings after the introduction of the sustainability rating. The effect is particularly strong for funds with a five-globe rating, which experienced a 0.44% increase in monthly inflows and a 0.67% increase in monthly rankings relative to funds with a one-globe rating. The authors also find that the effect is stronger for retail investors than for institutional investors, suggesting that individual investors are more likely to value sustainability than professional investors.

The authors further analyze the characteristics of the funds that received higher sustainability ratings and find that they tend to have lower fees, lower turnover, and higher active share than funds with lower sustainability ratings. The authors argue that these characteristics are consistent with the idea that sustainable investing is a form of active management that requires more research and engagement with companies, which in turn leads to higher fees and lower turnover.

The authors conclude that their findings have important implications for investors and companies. For investors, the findings suggest that sustainability is a factor that can help them achieve their financial goals, as funds with higher sustainability ratings tend to perform better than funds with lower sustainability ratings. For companies, the findings suggest that sustainability is a factor that can help them attract capital, as investors are more likely to invest in companies that are committed to sustainability. The authors also note that their findings are consistent with the idea that sustainable investing is a form of active management that requires more research and engagement with companies, which in turn leads to higher fees and lower turnover.