Sustainability ratings and investor behaviour: An analysis of European mutual fund flows

Abstract

This thesis explores the impact of Morningstar Sustainability Ratings on mutual fund flows within the European market, analysing a dataset spanning from 2016 to 2024. While Hartzmark and Sussman (2019) demonstrate a strong correlation between these ratings and fund flows in the U.S. market following their 2016 release, European investors initially exhibited less interest. This thesis examines whether European investors’ attitudes toward sustainable investing have evolved, particularly in response to increasing regulatory focus on sustainability.

The findings indicate that funds with high sustainability ratings (five-globe) consistently attract significant inflows, while mid-rated funds exert minimal influence on investor behaviour. Surprisingly, low-rated funds (one-globe) do not experience substantial outflows, reflecting muted penalties for poor ESG performance. Temporal analysis reveals that the impact of sustainability ratings on fund flows diminishes over time, likely due to increased regulatory transparency and the di-versification of ESG evaluation tools.

This study contributes to the growing literature on sustainable investing by providing empirical evidence of the long-term dynamics between sustainability ratings, fund flows, and regulatory developments. While the findings align with earlier U.S. studies, they underscore the unique cultural and regulatory factors shaping European markets. The research highlights the importance of simplified sustainability metrics, such as Morningstar’s globe ratings, in driving initial investor engagement, while emphasizing the evolving role of regulatory frameworks in shaping sustainable investing practices.