ESG Investments in Turbulent Waters : A Fund Flow Analysis During Market Distress : An empirical analysis of European sustainability-rated mutual funds before and after the outbreak of the COVID-19 pandemic & the Russia-Ukraine war

Abstract

This thesis explores how investments focused on Environmental, Social, and Governance (ESG) criteria are affected by two distinct economic shocks: the COVID-19 pandemic and the Russia-Ukraine war. To examine the main objectives of the study, we analyze how net flows vary across mutual funds with different sustainability ratings during times of crisis, referring to funds with high sustainability ratings as ESG investments. Our study reveals that the impact on ESG investments varies between the two shocks, challenging the established view of their steady resilience during periods of market distress. We find that ESG investments in general navigated through the pandemic with minimal disruption. However, these funds did not show higher resilience compared to other funds, pointing towards a widespread steadfastness in the market. The analysis of the war, on the other hand, presents a contrasting picture, where ESG investments displayed relatively lower resilience, while low sustainability-rated funds emerged as the most robust group. The observed shift in investor sentiment away from ESG investments after the outbreak of the war points towards a crisis-driven reevaluation of these investments’ appeal. The insight from our study raises questions related to the motivations behind ESG investing, previously attributed to ethical concerns, suggesting a more complex interplay of ethical and financial drivers. Our findings also reveal different investor responses when comparing retail and institutional investors. We observe that retail funds drive the findings of our overall fund analysis and appear to reflect the broader market sentiment more accurately. In sum, our research adds depth to the understanding of how ESG investments are impacted when facing economic shocks, challenging the notion of ESG investments as safe havens during market distress.