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Sustainability or Performance? Ratings and Fund Managers’ Incentives

Author

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

Abstract

We show that following the introduction of Morningstar’s sustainability ratings (the “globe†ratings), mutual funds attempt to improve their globe ratings by increasing their demand for sustainable stocks. This trading behavior creates buying pressure, making stocks with high sustainability ratings overvalued. As a consequence, a tradeoff between sustainability and performance arises and the performance of funds improving their globe ratings deteriorates. As performance appears to be more important in attracting flows than sustainability, a new equilibrium emerges in which the globe ratings stop affecting investor flows and funds no longer trade to improve their globe ratings. Our results highlight the issues arising when funds are evaluated along two different dimensions that create conflicting incentives for fund managers competing for flows.

Suggested Citation

  • Gantchev, Nickolay & Giannetti, Mariassunta & Li, Rachel, 2021. "Sustainability or Performance? Ratings and Fund Managers’ Incentives," CEPR Discussion Papers 15945, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:15945
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    Citations

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    Cited by:

    1. Alessio M. Pacces, 2021. "Will the EU Taxonomy Regulation Foster Sustainable Corporate Governance?," Sustainability, MDPI, vol. 13(21), pages 1-21, November.
    2. Sirio Aramonte & Frank Packer, 2022. "Information governance in sustainable finance," BIS Papers, Bank for International Settlements, number 132.

    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
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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