Is there a relationship between Morningstar's ESG ratings and mutual fund performance?

We analyze the relationship between Morningstar's ESG ratings and the performance of 146 mutual funds domiciled in Norway. Dividing the sample into ESG quintiles, we find no evidence of rating level effects, nor do we find any abnormal risk-adjusted returns (alphas). However, there is a recurring notion of a geographical bias in the distribution of sustainability ratings. Analyzing the European categorized funds separately, we find significantly higher returns and (positive) alphas for the top ESG quintiles. Furthermore, we find evidence of an ESG momentum effect in the way that performance improves in parallel with improved ESG ratings. Taken at face value, this indicates that there may be a financial reward from tilting investments towards European companies with high ESG rating or in general investing in companies with a low ESG rating and, as an active owner, contribute to an improvement of the fund's rating.