Do investors care about ESG when markets turn sour? Evidence from the mutual fund industry during the COVID-19 crisis

Abstract: This thesis empirically examines the effect of the sustainability rating on sustainable fund returns and fund flows to gain a better understanding of the motivation underlying sustainable investing. By conducting panel regression analyses as well as Difference in Difference analyses on a selected sample of EU equity funds, we show that under normal market conditions sustainable funds outperform conventional funds. However, during the crisis period we find this effect to vanish. Furthermore, we find high sustainability ratings positively affecting fund flows overall. This trend was interrupted by the COVID-19 crash, as we provide evidence on sustainable funds experiencing fund outflows caused by the exogenous shock. We therefore conclude that sustainable investors are predominately driven by financial rather than by non-pecuniary motivations as they turned away from their investments once markets turned sour and once superior returns could not be achieved through sustainable investment anymore.