{'fraction_non_alphanumeric': 0.017085427135678392, 'fraction_numerical': 0.0, 'mean_word_length': 5.775510204081633, 'pattern_counts': {'":': 0, '<': 0, '<?xml version=': 0, '>': 0, 'https://': 0, 'lorem ipsum': 0, 'www.': 0, 'xml': 0}, 'pii_count': 0, 'substrings_counts': 0, 'word_list_counts': {'cursed_substrings.json': 0, 'profanity_word_list.json': 0, 'sexual_word_list.json': 0, 'zh_pornsignals.json': 0}}
Sustainability or Performance? Ratings and Fund Managers’ Incentives

We use the introduction of Morningstar’s sustainability ratings (the “globe” ratings) as an exogenous shock to mutual funds’ preferences and show that mutual funds initially attempt to improve their globe ratings by increasing their demand for sustainable stocks. This trading behavior creates buying pressure, making stocks with high sustainability ratings overvalued. As a consequence, a tradeoff between sustainability and performance arises and the performance of funds improving their globe ratings deteriorates. Since performance appears to be more important in attracting flows than sustainability, a new equilibrium emerges in which the globe ratings stop affecting funds’ flows and funds do not trade any longer to improve their globe ratings. Our results highlight the issues arising when funds are evaluated along two different dimensions that create conflicting incentives for fund managers who compete for flows.