Do Sustainability Ratings Matter? Evidence from Private Wealth Investment Flows

Abstract

This study examines the effect of sustainability ratings on investors’ asset allocation decisions. Using a proprietary dataset of monthly equity and bond holdings of European private wealth investors, we document significantly larger investment flows into assets with high sustainability ratings compared to those with low ratings. We further find that investors react to changes in sustainability ratings of their portfolio assets by rebalancing their portfolios towards assets with higher sustainability ratings. Exploiting a quasi-exogenous shock to the salience of sustainability ratings we document a plausibly causal effect of assets' sustainability ratings on wealthy retail investors' investment decisions. We do not find that the larger investments into assets with high sustainability ratings can be explained by differences in attention or news flow, or that they are due to significant differences in financial performance.

Keywords: ESG ratings, sustainable investing, retail investors, private wealth, asset allocation, investment flows

JEL Classification: G11, G14, G15, G29, G41, G50