The Costs of Being Sustainable

Abstract

We assess the sustainability footprint of mutual funds through the holdings they have. Rather than relying on ESG metrics, we define the sustainability of a company by its average impact (either positive, or negative) on the 17 UN’s Sustainable Development Goals (SDGs). We document that funds aligned with SDGs attract inflows only if they also have a sustainability mandate. For funds without a clear sustainability mandate, the relationship is opposite: those that are more aligned with SDGs, attract fewer flows. When we decompose scores in their positive and negative component, we find that it is mainly the negative component that drives our results. This suggests that, despite investors’ preference for sustainable funds, investors limit their actions to excluding funds that are negatively aligned with SDGs rather than increasing capital inflows towards funds that are positively aligned. Our findings indicate that investors divest from non sustainable funds into “neutral” funds, instead of contributing to advancing SDGs.

Keywords: sustainable development goals, sustainable investing, mutual funds, investor preferences

JEL Classification: G11, G23, Q56