Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows. Flashcards
Hartzmark, Sussman (2019)
What is the main idea behind the paper?
Investots believe that higher sustainability ratings are worth investing in, although there is no proof of better performance of the companies.
How Morningstar Sustainability Ratings are working? What investors focus on?
They are based on ESG activities. They rank 1 to 5 globes, which investors mostly look at. Additionally there is percentile and sustainability score, which investors do not look at much.
What happened after the Morningstar publication to fund flows?
Over 11 months after publication 12-15 billion in assets left one-globe funds and 24-32 billion in assets entered five-globe funds as a result of their globe rating.
How does Institutional Constraints affect why investors value sustainability?
Institutional investors are often obliged to hold high sustainability stocks. Institutional share classes face constraints that force them to behave like other investors, thus, their preferences are similar to other investors.
How do Rational Performance Expectations affect why investors value sustainability?
Investors might rationally think that sustainability is a positive predictor of future fund performance. If investors believe that sustainable funds outperform, then funds will flow to high sustainable funds.
Actual evidence: inverse relation or no relation between globe ratings and returns.
How do Irrational Expectations and Nonpecuniary Motives affect the Value of Sustainability for Investors?
Investors might have though that sust rating would lead to high future returns OR they simply had non-monetary preferences for holding more sustainable funds.
Authours found evidence on irrational expectations and non-monetary motives.
Does sustainability ratings represent financial performance of company?
No they do not prove, however, many investors still choose to invest in them.
In economic downturn, ESG stocks experience less volatility.
Choosing stocks with good ESG is most likely explained by irrational behavior and non-monetary motives.
