Mutual Fund Trading and ESG Clientele

This paper studies trading behavior of actively managed equity mutual funds comparing Environmental, Social and Governance (ESG) and conventional funds during a market collapse. Using monthly holdings data and the COVID-19 market crash as a quasi-natural experiment, we find that ESG funds maintained a stable share of their portfolio in ESG stocks in response to fund outflows during the crash. In contrast, conventional funds, who experienced outflows the most, increased their net sales to flows for ESG and non-ESG stocks. Results are consistent with ESG funds catering to their clientele in market downturns, contributing to market stability for ESG stocks.