Mutual funds’ loyalty helped to stabilise ESG stocks during the COVID-19 market crash

Rui Albuquerque, Yrjo Koskinen, Raffaele Santioni 23 November 2021



Covid-19 resulted in a sudden stock market crash, unrelated to underlying economic conditions. Stock prices declined (on average) by close to 30% during the crash, but performance varied significantly across firms. Stocks with high environmental, social, and governance (ESG) ratings performed better in February and March 2020, with higher returns and lower volatility relative to non-ESG stocks (Albuquerque et al. 2020a, 2020b, Ding et al. 2020, Garel and Petit-Romec 2021). In addition, ESG-oriented actively managed mutual funds experienced fund inflows during the crisis period, whereas other funds manifested increases in fund outflows (Pastor and Vorsatz 2020).

In Albuquerque et al. (2021), we connect these two streams of evidence by asking if the trading behaviour of actively managed equity mutual funds contributed to the observed resiliency of ESG stocks during the crash. Recent evidence suggests that ESG fund investors are more loyal than other investors as they demonstrate less sensitivity to fund performance (Bollen 2007, Renneboog et al. 2008). We suggest that this behaviour facilitates ESG-oriented fund managers to weather storms by avoiding fire sales and displaying loyalty towards their portfolio stocks. 

Our empirical approach

To test this hypothesis, we use the heterogeneity in fund flows into ESG and non-ESG actively managed US equity mutual funds during the stock market crash of 2020. ESG funds generally experienced an increase in net flows during this period (Figure 1), except in March. In contrast, non-ESG funds experienced a pronounced decline in net flows through the whole period, especially starting in March. The exogenous crash that occurred in February and March 2020 is an ideal event where we can test for the loyalty of ESG and non-ESG mutual funds to ESG stocks and to non-ESG stocks.

Figure 1 Fund flows and sustainability rating (% of total net assets)

Notes: Morningstar Direct. This figure plots aggregate cumulative net fund flows from January 1 to June 30, 2020, using monthly fund flows, for two fund categories, those that receive by Morningstar 4 or 5 Globes (ESG funds) and those with less than 4 Globes (non-ESG funds).

In carrying out the analysis, we use a similar empirical model to that of Cella et al. (2013) to study the trading behaviour of US actively managed equity mutual funds during the first six months in 2020, paying special attention to the market crash months of February and March. Our main data source is a proprietary granular data set from Morningstar, with portfolio holdings collected at the monthly frequency (instead of the commonly used, and publicly available, quarterly data). The use of monthly data allows us to identify February and March of 2020 as the stock market crash months, as opposed to the entire first quarter, which would be the case if we were limited to using quarterly data.

In our econometric analysis, fund-level net sales are a function of funds’ ESG-orientation; flows and fund size; a stock market crash dummy; as well as aggregate stock market returns and volatility. Fund-level ESG orientation is measured by different metrics provided by Morningstar. We denote as ‘ESG funds’ those that report being such in their prospectus. In addition, ESG funds are those with a Morningstar Sustainability Globe rating of 4 or 5 as of January 2020. As a third definition, ESG funds are those that receive a ‘low-carbon designation’ from Morningstar as of January 2020. The main variables in our panel regressions are fund inflows and outflows obtained by separating funds based on whether they experienced relatively more gross inflows or more gross outflows. Figure 2 shows that inflows took a hit in February for both ESG and non-ESG funds, but especially for non-ESG funds. Inflows recovered quickly by March, whereas outflows were slower to respond, plummeting in March. The figure also shows that the funds experiencing outflows have double the total net assets compared with funds encountering inflows. This is consistent with a declining industry trend. It should be noted that non-ESG funds are mostly responsible for this phenomenon.

Figure 2 Fund inflows and outflows and sustainability rating (% of total net assets)

(a) Inflows

(b) Outflows

Notes: Morningstar Direct. Panel A (Panel B) plots the weighted average of monthly Inflows (Outflows), weighted by lagged fund total net assets, from January 1 to June 30, 2020, for two categories of funds, those that receive by Morningstar 4 or 5 Globes (ESG funds) and those with less than 4 Globes (non-ESG funds). Inflows is equal to fund flow in month t divided by net assets under management in month t–1 if positive, otherwise zero. Outflows is equal to the absolute value of fund flow in month t divided by net assets under management in month t–1 if negative, otherwise zero.

ESG funds buy more aggressively 

Our first set of estimates show that fund flows are major determinants of net sales. Second, ESG funds reduced net sales during the crash. Third, the mitigating effect of inflows on net sales is always in place and it is more pronounced for ESG-funds compared with non-ESG funds, whether in the crash period or not. Overall, ESG funds buy more aggressively in response to inflows. Fourth, there is no difference in behaviour between ESG-oriented and other funds in response to outflows: outflows increased net sales for both ESG-oriented and other funds, whether in the crash period or not.

Our initial hypothesis assumes that funds trade their portfolio stocks in a uniform fashion, whether they are ESG or non-ESG funds. But examining stock-level holdings is important since we know that both ESG-oriented and other funds hold both ESG and non-ESG stocks in their portfolios. Ultimately, we are interested in uncovering the reason for why these stocks exhibited resiliency during the crash. Fund managers’ portfolio allocation decisions may have contributed to the observed stock resiliency, in addition to mutual fund investor behaviour. We therefore study the portfolio stocks that funds chose to trade during the stock market crash by splitting each fund’s portfolio into ESG-appropriate and non-ESG-appropriate stocks. In order to do so, we retrieved firm-specific environmental and social scores in 2019 from Thomson Reuters’ Refinitiv. 

Portfolios are tilted towards ESG stocks

We have two main findings. First, we find no difference in net sales for ESG and non-ESG funds towards ESG versus non-ESG stocks in response to fund inflows. Since we know from prior research (Pastor and Vorsatz 2020) that, during the crash, ESG-oriented funds were the ones that experienced inflows, we conclude that inflows to ESG funds are a major reason why these stocks exhibited resiliency during the crash months of February and March. Second, while there is no difference in behaviour between ESG funds and other funds in response to outflows in terms of their aggregate net sales as indicated above, we find that funds’ behaviour displays significant heterogeneity toward ESG and non-ESG stocks. In particular, sensitivity of net sales to fund outflows increased during the crash for non-ESG stocks for all fund types, but most remarkably, this does not hold for ESG stocks. The sensitivity of net sales to outflows for ESG stocks remained largely unchanged in the crash period for ESG-oriented and other funds. Recall that non-ESG funds were the ones that mostly experienced outflows. This implies that non-ESG funds contributed significantly to the observed resiliency of ESG stocks. In related research, Glossner et al. (2021) find that institutional investors favoured stock with low debt and high cash balances during the Covid-19 market crash, but not stocks with better ESG performance. This last result contrasts with what we find. The difference, we believe, is due to the more granular monthly holdings data that we have access to. More research is needed to identify the disparities. Using monthly data in contrast to quarterly data is important given the significant monthly variations in fund flows observed in the first quarter of 2020.


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Albuquerque, R, Y Koskinen, S Yang and C Zhang (2020b), “Resiliency of environmental and social stocks: An analysis of the exogenous Covid-19 market crash”, Review of Corporate Finance Studies 9: 593-621.

Albuquerque, R, Y Koskinen and R Santioni (2021), “Mutual fund loyalty and ESG stock resilience during the COVID-19 stock market crash”, European Corporate Governance Institute, Finance Working Paper 782.

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Ding, W, R Levine, C Lin and W Xie (2020), “Corporate immunity to the COVID-19 pandemic”, Journal of Financial Economics 141: 802-830.

Garel, A and A Petit-Romec (2021), “Investor rewards to environmental responsibility in the COVID-19 crisis”, Journal of Corporate Finance 68(101948)

Glossner, S, P P Matos, S Ramelli and A F Wagner (2021), “Do institutional investors stabilize equity markets in crisis periods? Evidence from Covid-19”, CEPR Discussion Paper 15070

Pastor, L and M B Vorsatz, (2020), “Mutual fund performance and flows during the Covid-19 crisis”,, 30 July. 

Renneboog, L, J Ter Horst and C Zhang (2008), “Socially responsible investments: Institutional aspects, performance, and investor behavior”, Journal of Banking and Finance 32: 1723-1742.



Topics:  Covid-19 Financial markets

Tags:  COVID-19, financial markets, stock market, mutual funds, ESG

Professor of Finance and Seidner Faculty Fellow, Carroll School of Management, Boston College; CEPR Research Fellow; ECGI Research Member

BMO Professor of Sustainable and Transition Finance, Haskayne School of Business, University of Calgary; ECGI Research Member

Economist, Bank of Italy


CEPR Policy Research