Is individual investors' ESG appetite under pressure?
“In a difference-in-differences framework using retail fund ow and sustainability rating data from Morningstar, we find that investor preference for sustainability significantly weakens under economic and market stress,” the authors of the research said.
They said that before the crisis, high ESG funds – those with high Morningstar sustainability ratings – enjoyed higher-than-average weekly retail fund flows. But they lost those relatively higher capital flows after the pandemic first started slamming markets during the week of February 22.
They also found that those high ESG funds were more likely than the average fund to suffer net retail redemptions during the COVID-19 crisis compared to before.
“Moreover, this shift in flow persists into the weeks from March 28 to April 25, when the market rebounded dramatically after the US stimulus package was announced on March 23,” the authors said.
But when it comes to institutional investors, they found that inflows into high ESG funds were not dampened, and only low ESG funds saw sharp but temporary drops in inflows during the early crash period. To explain the difference, they pointed to the high minimums and substantially lower expense ratios that typically characterize institutional share classes of mutual funds, as well as a greater prominence of strong ESG mandates among institutional investors.