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Sustainability or performance? Ratings and fund managers’ incentives

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  • Gantchev, Nickolay
  • Giannetti, Mariassunta
  • Li, Rachel

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.

Suggested Citation

  • Gantchev, Nickolay & Giannetti, Mariassunta & Li, Rachel, 2024. "Sustainability or performance? Ratings and fund managers’ incentives," Journal of Financial Economics, Elsevier, vol. 155(C).
    • Handle: RePEc:eee:jfinec:v:155:y:2024:i:c:s0304405x24000540
    DOI: 10.1016/j.jfineco.2024.103831
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    More about this item

    Keywords

    Sustainability; ESG; Mutual funds; Fund flows; Ratings;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G2 - Financial Economics - - Financial Institutions and Services

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