Do Investors Want Companies That Are More Sustainable?

Morningstar, one of the leading US investment research companies, in March 2016 published sustainability ratings for more than 20,000 mutual funds collectively holding upwards of $8 trillion. Morningstar awarded each mutual fund between one and five globes depending on how sustainable it was deemed to be. Funds with the lowest 10 percent of sustainability scores received one globe, while those with the highest 10 percent received five.

Investors rewarded funds rated high in sustainability and punished those rated low. Between $12 billion and $22 billion flowed out of the one-globe mutual funds, while between $22 billion and $34 billion flowed into five-globe funds, according to Hartzmark and Sussman. The lowest-rated funds were more likely to close altogether after the outflows.

Investors responded to funds rated high or low in sustainability, interpreting five-globe ratings and one-globe ratings as clear positive or negative signals. Meanwhile, investors largely ignored the ratings for funds in between these two extremes, as well as the underlying details that were available about the ratings.

Hartzmark and Sussman find that investors believe more-sustainable companies will experience higher future returns with lower risk, although the researchers don’t find evidence that sustainable companies actually outperform on a risk-adjusted basis. Institutional investors behaved similarly to noninstitutional investors, the data suggest.

“The average market participant in US open-end mutual funds puts a positive value on sustainability,” Hartzmark and Sussman conclude.