Sustainability or Performance? Ratings and Fund Managers’ Incentives

58 Pages Posted: 2 Dec 2020 Last revised: 8 Jun 2021

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: May 16, 2021

Abstract

We explore how mutual fund investors collectively value sustainability when the tradeoff with performance becomes salient. Following the introduction of Morningstar’s sustainability ratings (the “globe” ratings), mutual funds increased their holdings of sustainable stocks in an attempt to improve their globe ratings. This trading behavior created buying pressure, decreasing the returns of stocks with high sustainability ratings. Consequently, a tradeoff between sustainability and performance emerged and the performance of funds improving their globe ratings deteriorated. Since performance appears to be more important in attracting flows than sustainability, in the new equilibrium, the globe ratings do not affect investor flows and funds do not trade to improve their globe ratings.

Keywords: Sustainability; ESG; Mutual Funds; Fund Flows; Ratings

JEL Classification: G11, G12, G23, G24

Suggested Citation

Gantchev, Nickolay and Giannetti, Mariassunta and Li, Qingqiu, Sustainability or Performance? Ratings and Fund Managers’ Incentives (May 16, 2021). 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)

London
United Kingdom

European Corporate Governance Institute (ECGI)

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

Qingqiu 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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