Does sustainability score impact mutual fund performance?

Abstract

Given that sustainable investing constitutes a major force across global financial markets, in 2016 Morningstar began reporting Morningstar Sustainability scores. We used the 2016, 2017 and 2018 scores to study the e ects of socially responsible investments (SRI) on European equity fund performance. Sustainability scores impacted positively on performance, which was consistent with the idea that the mutual funds invested in companies with better scores generate better risk-adjusted and not-risk adjusted performance. We also tested the relation on mutual fund flows and risk. The sustainability score in the previous year is significant on the flows, so higher-rated funds receive a larger volume of funds. In terms of risk, the level of sustainability is negatively related to the value at risk (VaR) of the fund, supporting that higher scored mutual funds o er better protection against extreme lossesThis research was funded by (1) the Galician Regional Government ED431B 2017/34 and ED431D 2017/19 co-funded by the European Regional Development Fund (ERDF/FEDER) within the period 2014-2020 and (2) the Ministry of Science, Innovation and Universities (MCIU), the Spanish State Research Agency (AEI) and European Regional Development Fund (RTI2018-100702-B-I00 MCIU/AEI/FEDER, UE)S