Mutual Fund Loyalty and ESG Stock Resilience during the COVID-19 Stock Market Crash

Abstract

This paper studies the trading behavior of U.S. actively managed equity mutual funds during the COVID-19 market crash. We show that Environmental, Social, and Governance (ESG) funds helped to stabilize the market by contributing to the resiliency of ESG stocks, but interestingly non-ESG funds also provided support for ESG stocks. First, ESG funds reduced net sales during the crash, controlling for fund flows. Second, all funds experiencing inflows helped to stabilize the market during the crash by increasing net purchases, but this behaviour was more pronounced for ESG funds. Third, funds experiencing outflows also played a key role contributing to the relative stability of ESG stocks as both ESG and non-ESG funds more aggressively sold their non-ESG stocks. We are able to uncover these results because we use monthly holdings data from Morningstar, instead of the commonly used quarterly data.

Keywords: Environmental and social responsibility, institutional investors, fund flows, trading horizon, COVID-19, stock market crash, investor loyalty

JEL Classification: G01, G12, G23, G32, M14