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

Does sustainability move capital markets, or simply decorate investment products?

When Morningstar launched a simple globe-based sustainability rating in March 2016, it repackaged existing ESG data into an attention-grabbing format for over $8 trillion of US mutual fund assets.

Samuel M. Hartzmark and Abigail B. Sussman study how investors collectively responded to this surge in sustainability visibility in their paper "Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows".

Using monthly net-flow data before and after March 2016 and laboratory experiments with MBA and MTurk participants, they isolate causal flow responses to sustainability salience and conclude:

• Funds assigned the lowest one-globe sustainability rating experienced average net outflows of –0.46% of total net assets per month compared to their peers, representing £12–15 billion in withdrawals over the 11 months post-publication.
• Conversely, funds rated highest in sustainability saw net inflows of +0.33% per month, amounting to £24–£32 billion of new assets over the same period, despite no new fundamental information.
• Investors focused on extreme ranks rather than granular percentile scores and showed no significant flow response to intermediate two, three, or four-globe ratings.
• In lab experiments, each additional globe raised expected one-year returns by ~0.4 to ~0.8 point on a seven-point scale while cutting perceived risk by ~0.6–0.8 points.

By focusing investor attention on the simple globe icons, the globe system risks incentivising funds managers to make cosmetic portfolio changes to secure higher rating rather than driving real environmental or social impact. As the authors warn, funds "aware that ratings induce flows… may actively trade to receive a higher sustainability rating" at the expense of genuine ESG improvements, fostering greenwashing. The study faces several limitations, including the limited 11-month post-publication window that may overlook longer-term performance or flow persistence, and anonymised fund data precluding holdings-level analysis.