The Impact of the Morningstar Sustainability Rating on Mutual Fund Flows

Abstract

We examine the effect of the introduction of Morningstar's Sustainability Rating in March 2016 on mutual fund flows. Exploiting this shock to the availability of sustainability information we find strong evidence that retail investors shift money away from low-rated and into high-rated funds. An average high-rated retail fund receives between $4.1m and $10.1m higher net flows and an average low-rated retail fund suffers from $1.0m to $5.0m lower net flows than an average-rated fund during the first year after the publication of the Rating. Institutional investors react much more weakly to the publication of the Rating.

When Investors Call for Climate Responsibility, How Do Mutual Funds Respond?

“…The effect is stronger for European funds, for which the rewards-for-LCD amount to 46 basis points higher monthly flows, equal to an overall increase during our sample period of 3.7% of assets under management. These findings hold controlling for many other factors, including the generic sustainability "Globes" for which prior work had shown an impact on fund flows (Ammann, Bauer, Fischer, and Muller, 2018;Hartzmark and Sussman, 2018). Importantly, funds that lost (received) the LCD in the quarterly updates that followed the initial publication, experienced similarly-sized negative (positive) flow effects.…”

“…Hypothesis 1 (Rewards-for-LCD): Mutual funds that receive the Low Carbon Designation experience higher inflows than mutual funds that do not receive it. This is akin to the studies of Ammann, Bauer, Fischer, and Muller (2018) and Hartzmark and Sussman (2018) who examine the impact that the introduction of Morningstar's sustainability ratings had on fund flows. They show that mutual funds with a high sustainability score exhibited an abnormal increase in flows compared to those with a low sustainability score.…”

“…For each fund, we also collect information on the net expense ratio reported in the latest prospectus, age, global category (capturing the investment style), whether the fund is classified as "socially conscious" 6 , and its overall sustainability ratings (the Morningstar "Globes", on a 1-5 scale, with 5 to indicate top sustainability performers). To account for the findings in Ammann, Bauer, Fischer, and Muller (2018) and Hartzmark and Sussman (2018), we define the variables ∆1 Globe and ∆5 Globes as the monthly changes of dummy variables indicating funds moving into and out of the two extreme sustainability categories (1 Globe and 5 Globes), considering the observations with continuing missing sustainability ratings as no change. We classify as institutional funds with more than 50% of assets in institutional share classes.…”

The Impact of Divestment Announcements on the Share Price of Fossil Fuel Stocks

“…Amer [51] finds a similar result for member organizations that fail to report to the United Nations Global Compact (UNGC). Ammann et al [52] found a significant positive impact of a Morningstar Sustainability Rating on mutual fund flows persisting up to one year after the announcement.…”

The performance of technical trading rules in Socially Responsible Investments

“…2 SRI ratings are important for investors as demonstrated by Cellier et al (2016), who show a decrease in trades prior to announcements, followed by a rise afterwards, indicating that investors care about announcements of extrafinancial ratings. Furthermore, Ammann et al (2018) show that the Morningstar Sustainability Rating has a huge impact on mutual fund flows, where in the first year after publication, higherrated funds receive between $4.1m and $10.1m higher net flows while lowrated funds receive between $1.0m to $5.0m lower net flows than averagerated funds. Also, Kim et al (2018) note that investors are attracted more to firms with higher CSR ratings.…”