Tha Impact of the Morningstar Sustainability Rating on Mutual Fund Flows

We examine the effect of the introduction of Morningstar’s Sustainability Rating in March 2016 on U.S. equity mutual fund flows. Exploiting this shock to the availability of sustainability information we establish a causal relation between sustainability and fund flows. Using panel regressions, propensity score matching, and an event study methodology we find strong and robust 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. The effect is caused by the publication of the Morningstar Sustainability Rating and not by a general attractiveness of sustainable funds. Institutional investors react much more weakly to the publication of the Rating.