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

Abstract

Examining a shock to the salience of the sustainability of the U.S. mutual fund market, we present causal evidence that investors marketwide value sustainability: being categorized as low sustainability resulted in net outflows of more than $12 billion while being categorized as high sustainability led to net inflows of more than $24 billion. Experimental evidence suggests that sustainability is viewed as positively predicting future performance, but we do not find evidence that high‐sustainability funds outperform low‐sustainability funds. The evidence is consistent with positive affect influencing expectations of sustainable fund performance and nonpecuniary motives influencing investment decisions.

Investment Barriers and Labeling Schemes for Socially Responsible Investments

“…Thus, our study confirms empirical results of previous studies who show that sustainability labels have a positive effect on the demand for SRI (e.g. Hartzmark and Sussman 2019). However, in addition to these studies we are able to show that labels also could overcome certain investment barriers, which again supports the second hypothesis.…”

“…This is a typical procedure in SC experiments or conjoint analyses (e.g. Bassen et al 2019;Hartzmark and Sussman 2019;Nakai et al 2018;Wilcox 2003), which often comprise hypothetical scenarios, alternatives, or attributes. However, we included some typical techniques in order to mitigate potential hypothetical bias, as described below.…”

“…Borgers and Pownall 2014) or have irrational beliefs about the relationship between returns and risk of socially responsible funds (e.g. Hartzmark and Sussman 2019). However, among the scarce studies on individual investor decisions and SRI, only a very few examine which different investment barriers 3 , such as the perceived financial performance (e.g.…”

“…There has been growing interest in the recent years to establish transparency guidelines, transparency labels, or sustainability labels to facilitate private investors' search for and the transparency of socially responsible equity (or generally mutual) funds. In Europe, the existence of transparency labels by Eurosif, the Austrian Ecolabel, the French Novethic SRI Label, the French Novethic Exceptions are the studies by Bassen et al (2019), Døskeland and Pedersen (2016), , and Hartzmark and Sussman (2019). 6 However, none of these studies analyze whether labeling schemes help to overcome barriers, particularly for investors who have no socially responsible investments yet, but might want to invest in a socially responsible manner in the future.…”

The Dividend Disconnect

“…By splitting attention between price changes (large, dramatic changes in performance) and dividends (small stable gains), investors are focusing on salient aspects of equities, similar to the models of Bordalo, Gennaioli, and Shleifer (, ). The framing of salient attributes is an important aspect of why certain firms cater to investors in ways that are difficult to understand within simple value‐maximizing frameworks (e.g., Célérier and Vallée (), Ellison and Ellison (), Hartzmark and Sussman (), Harris, Hartzmark, and Solomon ()).…”