Environmental preference, air pollution, and fund flows in China

Abstract

This study investigates how air pollution affects investor behavior using Chinese environmental mutual funds (Green funds) over 2014–2019. We find that an increase in air pollution measured by the Air Quality Index (AQI) is accompanied by increases in Green fund flows. We also find that the positive flow-AQI association remains robust under various measures of AQI, greener fund names, or difference-in-difference tests on the air-pollution prevention law enactment. However, we do not find such evidence that the alternative fund manager channel can affect the flow-AQI relationship. Combined evidence supports the proposition that environmentally conscious investors derive their utility primarily from non-pecuniary considerations. We suggest that air pollution is a crucial determinant of Chinese environmental fund flows, an important finding for emerging economies globally.