Sustainable Investing During the War in Ukraine

This paper investigates how sustainable investing affects returns and investor flows of U.S. equity funds during the war in Ukraine. We find that funds with high sustainability ratings, low carbon risk, and low controversial involvement underperform their low sustainability counterparts. Sustainability performance does not reduce fund returns after controlling for fossil fuel and weapons exposures. Nevertheless, sustainable funds attract lower flows. We find no evidence of lower flow-return sensitivity among sustainable funds, suggesting that some investors are unwilling to pay for sustainability. The aggregate mutual fund sector increases holdings of carbon-intensive and weapon-related stocks, which in turn reduces the average sustainability performance and the number of low-carbon funds. Overall, these findings document a rare reversal of investor demand for sustainability after decades of rapid growth