Sustainability or Performance? Ratings and Fund Managers’ Incentives

Sustainability or Performance? Ratings and Fund Managers’ Incentives

Nickolay Gantchev, Mariassunta Giannetti, Rachel Li

Series number :

Serial Number: 
747/2021

Date posted :

March 19 2021

Last revised :

January 01 2023
SSRN Share

Keywords

  • Sustainability • 
  • ESG • 
  • mutual funds • 
  • Fund Flows • 
  • Ratings

We explore how mutual fund managers and investors react when the tradeoff between a fund’s sustainability and performance becomes salient. Following the introduction of Morningstar’s sustainability ratings (the “globe” ratings), mutual funds increased their holdings of sustainable stocks to attract flows.

Such sustainability-driven trades, however, underperformed, impairing the funds’ overall performance. Consequently, a tradeoff between sustainability and performance emerged. In the new equilibrium, the globe ratings do not affect investor flows and funds no longer trade to improve their globe ratings.

Authors

Real name:
Rachel Li