Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows

Research Retrieved: August 2018
Retrieve the paper from the University of Chicago


In principle, investor preferences with regard to sustainability can diverge widely: While some apprehend that sustainable investments are value-reducing, others expect the opposite – and yet others might not expect financial benefits, but still prefer sustainable over conventional investments for non-pecuniary reasons. Given this diversity, it remains unclear what investors collectively prefer, and this lack of clarity creates uncertainty for corporate investment decisions. Using a shock to the salience of sustainability performance caused by the introduction of Morningstar’s sustainability rankings, Hartzmark and Sussmann (2018) help shed light on this uncertainty and address the question how sustainability is evaluated by investors at large.

Key Findings

  • Sustainability attracts investments: Studying the aggregate investor response to the sustainability rankings release, the authors find that 11 months after the release, funds categorized as low sustainability experienced net outflows of more than $12 billion or 6% of the funds’ size – while high sustainability funds attracted more than $24 billion net inflows, accounting for 4% of the funds’ size.
  • Flows are not driven by institutional pressure or future performance: Inconsistent with the expectation that institutional scrutiny drives this trend, the patterns of institutional investment flow changes were indistinguishable from those of other investors. Moreover, the authors find no evidence that high sustainability funds outperformed their peers after the release – contradicting that the flows were motivated by a rational expectation of superior performance driven by sustainability.
  • Emotions and non-financial preferences matter: To better understand the motives that could drive the fund flows, the authors simulated the rankings introduction in the lab. The outcome suggests that investors have irrational expectations with regard to sustainable investments, expecting both higher returns and lower risks, and reveal non-pecuniary preferences as an additional motivation for the resource re-allocation.


Meaning for Practice

In line with the notion that sustainable investing becomes mainstream, this study suggests that investors, in aggregate, are not neutral when it comes to valuing sustainable performance, but that sustainability matters to mutual fund investors at large.