|We analyse the effect of the Morningstar Sustainability Rating on fund flow in the
European mutual fund market. The Covid-19 recession in March 2020 was a pivot for the
industry, and we look at one-year periods before and after. Through OLS and fixed effects
methods, we find that investors value the Morningstar Sustainability Rating, as higher
ratings are associated with higher fund flow. The results show an increased impact of
sustainability ratings following the recession, suggesting a change in fund flow dynamics.
Furthermore, through a difference-in-difference model we provide evidence that flow to
High-rated funds increased following the recession and that the High-rated funds have
relatively higher inflow compared to Low-rated funds. The impact on each domicile varies.
More than half of the sample countries have higher expected fund flow for High-rated
funds than Low-rated funds throughout the entire period. However, only a small portion
of the countries have increased fund flow to High-rated funds following the Covid-19