How Morningstar Sustainability Stars Affect Mutual Fund Flows
Summary
The article reviews research on the 2016 launch of Morningstar’s sustainability ratings for U.S. mutual funds. The ratings use portfolio holdings and company ESG scores to assign funds one to five stars within their categories; the star display appears more prominently than the underlying score and percentile rank. The study examines whether this new presentation changed fund demand, using monthly fund flows and comparisons around the rating launch and star cutoffs.
Flows increased for five-star funds and decreased for one-star funds, while the three middle ratings had no clear effect. Investors appeared to respond mainly to the categorical stars rather than the detailed quantitative measures. The article reports no evidence that highly rated funds subsequently performed better; low-rated funds performed similarly or sometimes better. The results suggest that how information is categorized and displayed can affect investor decisions, but the evidence concerns historical U.S. fund data and does not establish why each investor responded or whether the effect generalizes to other markets.
Key ideas
- Morningstar assigned sustainability stars using fund holdings and ESG scores for portfolio companies.
- After the ratings launched, flows favored five-star funds and moved away from one-star funds.
- The middle star categories showed no clear flow response.
- Investors responded more to the prominent star category than to the underlying score or percentile rank.
- The study found no evidence that higher sustainability ratings predicted better subsequent returns.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.