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

Abstract

We investigate ESG preferences during economic distress revealed by retail mutual fund flows. Using COVID-19 as an economic shock, we show funds with higher sustainability ratings experience sharper declines in retail flows during the pandemic, highlighting fragile SRI demand by retail investors. Contrasting responses by less distress-prone institutional investors indicate that retail investors view sustainability as a luxury. Supporting this interpretation, high ESG funds in countries with stricter restrictions, weaker economic support, or lower growth during COVID-19 suffer disproportionately lower retail flows. Our findings are corroborated by recovering ESG flows during reopening periods, and falling internet search traffic on sustainability.

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

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