Climate Risk Perception and Mutual Fund Flows Implications for Performance

Abstract

We extract the sensitivity of mutual fund flows to negative climate change news, accounting for investor sentiment, past fund performance, and past fund flow. The resulting measure, climate-risk-flow sensitivity, positively predicts the cross section of mutual fund returns. This predictability is most pronounced in funds that experience inflows in response to negative climate-related news and those with stronger stock-selection abilities. Our results are robust and not driven by top-performing sustainable funds, long-term or recent fund performance, investor sentiment, or funds from the largest mutual fund families. Our findings offer important implications for understanding the impact of public climate change concerns on mutual fund performance.

Keywords: Climate change risk, mutual funds, negative climate news, fund flows, fund performance