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Sustainability or Performance? Ratings and Fund Managers’ Incentives

Swedish House of Finance Research Paper No. 21-4

European Corporate Governance Institute – Finance Working Paper No. 747/2021

77 Pages Posted: 2 Dec 2020 Last revised: 14 Nov 2023

See all articles by Nickolay Gantchev

Nickolay Gantchev

University of Warwick - Warwick Business School; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Mariassunta Giannetti

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Rachel Li

University of Alabama - Department of Economics, Finance and Legal Studies

Date Written: November 13, 2023

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

JEL Classification: G11, G12, G23, G24

Suggested Citation: Suggested Citation

Gantchev, Nickolay and Giannetti, Mariassunta and Li, Rachel, Sustainability or Performance? Ratings and Fund Managers’ Incentives (November 13, 2023). Swedish House of Finance Research Paper No. 21-4, European Corporate Governance Institute – Finance Working Paper No. 747/2021, Available at SSRN: https://ssrn.com/abstract=3731006 or http://dx.doi.org/10.2139/ssrn.3731006

Nickolay Gantchev (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

HOME PAGE: http://www.NickolayGantchev.com

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

HOME PAGE: http://cepr.org

European Corporate Governance Institute (ECGI) ( email )

HOME PAGE: http://ecgi.global/users/nickolay-gantchev

Mariassunta Giannetti

Stockholm School of Economics ( email )

P.O. Box 6501
Sveavagen 65
SE-113 83 Stockholm
Sweden
+46 8 736 9607 (Phone)
+46 8 312 327 (Fax)

HOME PAGE: http://sites.google.com/site/mariassuntagiannetti/Home

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Rachel Li

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States

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