Sustainability or performance? Ratings and fund managers’ incentives

Nickolay Gantchev, Mariassunta Giannetti and Rachel Li

Journal of Financial Economics, 2024, vol. 155, issue C

Abstract: 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.

Keywords: Sustainability; ESG; Mutual funds; Fund flows; Ratings (search for similar items in EconPapers)
JEL-codes: G11 G12 G2 G23 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:155:y:2024:i:c:s0304405x24000540

DOI: 10.1016/j.jfineco.2024.103831

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