Sustainability Preferences Under Stress: Evidence from Mutual Fund Flows During COVID-19

62 Pages Posted: 21 Jul 2020 Last revised: 15 Sep 2020

See all articles by Robin Döttling

Robin Döttling

Rotterdam School of Management, Erasmus University; Erasmus Research Institute of Management (ERIM)

Sehoon Kim

University of Florida - Department of Finance, Insurance and Real Estate

Date Written: September 14, 2020

Abstract

We investigate investor ESG preferences during economic distress revealed by US retail mutual fund flows. Using the COVID-19 pandemic as an unexpected shock to the economy, we show that "high ESG" funds with five-globe Morningstar sustainability ratings - which receive higher than average fund flows during normal times - experience a sharper decline in flows compared to other funds during the crisis. Consequently, high and low ESG fund flows converge as a percentage of assets under management. This effect is significant not only during the market crash weeks between February 22 and March 21, but also during the post-stimulus recovery weeks between March 28 and April 25. The results are not driven by style, time effects, fund size or age, star ratings, past returns, or investors buying the dip during the crash. Based on markedly different responses by institutional fund flows, our results are consistent with a shift in sustainability preference among retail investors under economic distress. We corroborate our findings with an inspection of internet search traffic data that shows falling interest in sustainability topics during the pandemic, as well as sample extensions covering non-US funds and state reopening periods. Our study highlights retail ESG fund flows as a potential source of fragility for sustainable investing.

Keywords: COVID-19, Mutual Fund Flows, Sustainable Investing, ESG, SRI

JEL Classification: D62, G11, G14, G23, G41, I10, M14

Suggested Citation

Döttling, Robin and Kim, Sehoon, Sustainability Preferences Under Stress: Evidence from Mutual Fund Flows During COVID-19 (September 14, 2020). Available at SSRN: https://ssrn.com/abstract=3656756 or http://dx.doi.org/10.2139/ssrn.3656756

Robin Döttling

Rotterdam School of Management, Erasmus University ( email )

P.O. Box 1738
Room T08-46
3000 DR Rotterdam, 3000 DR
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Sehoon Kim (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

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