Retail investors sustainability preferences and the Covid crisis

An interesting paper has been published by Robin Döttling (Rotterdam School of Management) and Sehoon Kim (University of Florida) about the impact of the Covid crisis on ESG retail mutual fund flows.

The working paper is called “Sustainability preferences under stress: Evidence from mutual fund flows during COVID-19”. 

Surprisingly, it is found that retail investors were less interested in sustainable investment during the Covid Crisis than before. These results are in contradiction with the widespread idea than the Covid Crisis has on the contrary increased the interest and investments in sustainable products

We summarized below some of the interesting takeaways of this publication.

A growing interest for sustainable investing

Global warming governance and social tensions have led investors to become more aware about sustainable finance over the past few years.

Investors are now looking to have a positive impact on the society and the planet, in their daily purchases but also their investments.

This awareness is reflected through a growing appetite for sustainable investing on financial markets.

Sustainable investment, the fastest growing area in the asset management

In line with this new appetite, sustainable investing has been one of the fastest growing areas in the asset management.

According to its biannual trend report, US SIF Foundation reported that US sustainable investments stood at $12 trillion as of 2018, nearly 38% higher compared to 2016 and over five-fold compared to 2010.

In order to regulate this new market and avoid greenwashing, financial regulators worldwide have started to publish new directives to better classify sustainable products and make sure that the investment advice is line with clients’ sustainability preferences.

This is the case in the European Union, for instance, where the European Securities and Markets Authority (ESMA) has made it compulsory for investment firms under the Insurance Distribution Directive (IDD) and the Markets in Financial Instruments regulation (MiFID II) to assess clients’ sustainability preferences and to take them into account in investment advice.

In parallel, the European Securities and Markets Authority (ESMA) implemented a Sustainable Finance Disclosure Regulation (the “SFDR”) and a European Taxonomy Regulation to help financial firms classify their products based on their sustainability factors.

Academic research on sustainability preferences

It is thus no surprise that recent academic research in finance has increasingly focused on understanding investors sustainability preference.

In particular, the working paper by Robin Döttling and Sehoon Kim focuses on the impact of the Covid crisis on retail investors sustainability preferences.


To do so, the researchers have used Morningstar data from US retail mutual fund flows during the outbreak of the novel coronavirus and the subsequent economic crisis that began in February 2020.

This data was used as a measure of ‘revealed preference’ of retail investors for sustainability.

Retail investors invested less in sustainable investment during the Covid crisis

Based on this data, the researchers found that retail investor preference for sustainability significantly weakened during the Covid crisis.

While funds with ‘five-globe’ Morningstar sustainability ratings (i.e. ‘high ESG’ funds) receive higher than average weekly retail fund flows prior to the COVID-19 crisis (consistent with Hartzmark and Sussman (2019) and Ceccarelli et al. (2020)), these flows disappear after the onset of the pandemic-induced market crash. Moreover, this shift in flow persists into the weeks from 28 March to 25 April 2020, when the market rebounded dramatically after the US stimulus package was announced. 

Retail investors were less interested in sustainable investing during the crisis

According to the paper, this lack of interest for sustainable investment is also supported by evidence of Google internet search traffic shifting dramatically away from topics related to sustainability to topics related to the economy.

How to explain these surprising results?

The results of this working paper may be surprising, since it is usually admitted on the contrary that ESG investments increased during the Covid Crisis and had better performance than non-ESG products.

This common perception may be biased by the fact that institutional investments in ESG have indeed increased during the crisis, but not retail investors’ investments.

This can be explained by the fact that institutional investors and asset managers are more sophisticated and less financially constrained.

They have strong ‘ESG mandates’ built into their charters and perform ‘ESG shareholder engagements’ as part of their core strategies.

On the contrary, retail investors are directly impacted by an economic crisis and are thus more likely to shift flows away from sustainable investments in response to market signals (Cao et al. 2018).

Another potential bias linked to this working paper is that only US data have been studied.

The impact of the Covid crisis on retail investors sustainability preferences may have been different in other geographies.


This working paper highlights a source of fragility in the demand for socially responsible investments, stemming from retail investors.

Under economic stress, retail investors seem to come back to more traditional than sustainable investments.

This working paper mitigates the common perception that the Covid Crisis has massively increased investors’ interest and investments in sustainable products.