Investor Behavior in Response to Climate Risks: Insights from Fund Flows

Abstract

This study examines the impact of climate risk on capital flows in U.S. equity mutual funds using a dataset of 2,633 funds from 2013 to 2018. Our two-step approach includes a grid search to identify predictive climate indices and assess investor responses to changes in climate risk. Funds with high sustainability ratings have lower average net flows. Yet, they attract significantly higher net flows during periods of negative climate news. These results suggest a strategic allocation of capital to hedge against climate risks or to reflect preferences for environmentally friendly investments. The implications extend to fund managers, investors and policymakers.

Keywords: Climate change risk, Environmental awareness, Fund flows, Mutual funds, Sustainability indicators, Sustainable investment