Investors’ response to the Morningstar sustainability rating : empirical evidence from Scandinavian mutual funds

Abstract

We examine the effect of the introduction of the Morningstar Sustainability Rating in March 2016 on mutual fund flows for Scandinavian funds. Making use of panel regressions and an event study, we find strong evidence that retail investors shift their money away from funds with high sustainability ratings to funds with low sustainability ratings. A low-rated fund receives on average a net flow per month 2.0 percentage points higher, and a high-rated fund suffers on average a net flow per month 1.2 percentage points lower than an average-rated fund during the first year after the launch of the rating. We find similar results in our sub sample analyses on countries, fund sizes, and fund categories. In the event study, we find that inflow is more sensitive to the launch of the rating than outflow, as investors respond immediately by investing in the low-rated funds, while investors exit high-rated funds with lags.