Abstract

ABSTRACT We use the entropy balancing method to study the impact of sustainability labels on mutual fund flows and returns. We compare the informativeness of the ESG risk metrics developed by a specialized agency – the Morningstar sustainability rating – with the ESG disclosure requirements introduced in the European Union by the Sustainable Finance Disclosure Regulation. We find investors to follow the Morningstar’s ESG ratings to inform their portfolio decisions, with more sustainable funds attracting larger net inflows. On the contrary, regulation-induced labels are generally not relevant to explain flow heterogeneity, with the only exception of Article 9 funds in which sustainable goals are the core investment objective; these latter funds also outperform their peers in terms of returns in line with ESG preferences strengthening over time.

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