“Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows” Hartzmark, Samuel M. and Abigail B. Sussman

Question 1

What is the main idea?

Answer 1

Investors believe that higher sustainability ratings are worth investing in, although there is no proof of better performance of the companies.

Question 2

What is the methodology used?

Answer 2

Used Morningstar sustainability (ESG) ratings (1–5 globes rating)

3 measures of sustainability:
 Globe rating – significant, got most attention
 Raw sustainability score – ignored
 Percentile rank of raw sust. score – ignored

Authors also conducted a survey to test the motives by asking people’s predictions about funds’ future performance, riskiness and asking them to allocate $1000 between the fund and savings account

Data about investment funds

Question 3

What is the main finding?

Answer 3

Mutual fund investors collectively treat sustainability as a positive fund attribute, allocating more money to funds ranked five globes and less money to funds ranked one globe

Question 4

Do investors value sustainability?

Answer 4

Before rating system no significant differences in fund flows.

After introducing globe rating: $12-15 billion in assets left one-globe funds and $24-32 billion in assets entered five-globe funds

Globe rating has a causal effect on fund flows;
One-globe rated funds had a higher probability of closing down;
Investors mostly pay attention to extreme globe ratings

Question 5

Why do investors value sustainability?

Answer 5

1. Institutional constraints (institutional investors often obliged to hold sustainable stocks)
   Reasons why inst. and noninst. investors similar:
   1) Institutional share classes face constraints that force them to behave like other investors
   2) Their preferences are similar to those of other investors
2. Rational performance expectations (investors may believe that sustainability is a predictor of good future performance of the fund). However, evidence about inverse/no relation between globe ratings and returns
3. Irrational Expectations and Nonmonetary Motives
   • Naive assumptions that high sust. rating = high future fund returns
   • Non-monetary preference for holding sust. mutual funds (altruism, warm glow, social motives)

Question 6

Are sustainability and the financial performance of a company related?

Answer 6

The sustainability ratings of stocks do not prove to represent the financial performance of the company, but investors still invest. Evidence about inverse/no relation between globe ratings and returns

In the situation of an economic downturn, stocks with a good ESG rating experience less volatility.

The reasons for choosing stocks with a good ESG standing is most likely explained by irrational behavior and non-monetary motives.

Question 7

What were the results of the survey?

Answer 7

People associate globe ratings with higher performance

Less sophisticated people rely on the globes slightly more

Participants reported that higher globe ratings would result in higher performance at lower risk (People assessed funds mostly on emotions not reasoning)