The Costs of Being Sustainable

We assess the sustainability footprint of mutual funds through the companies they hold. Instead of relying on ESG ratings, the sustainability of each company is measured based on its average impact---positive or negative---on the 17 United Nations Sustainable Development Goals (SDGs). We document that mutual funds aligned with the SDGs attract more inflows only when they explicitly adopt a sustainability mandate. In contrast, funds without such a mandate see reduced inflows as their alignment with the SDGs increases. It is the negative component that predominantly drives these patterns, suggesting that investors tend to exclude funds with negative SDG alignment rather than increasing capital inflows towards funds with positive SDG contributions. Despite investors' preference for sustainable funds, their actions are primarily focused on avoiding harm through divestments from non-sustainable into ``neutral'' funds rather than shifting capital towards funds that positively contribute to the SDGs.