Climate Risk Perception and Mutual Fund Flows: Implications for Performance

We extract the sensitivity of mutual fund flows to negative climate change news, accounting for investor sentiment, past fund performance and past fund flow. The resulting measure, climate‐news‐flow sensitivity, positively predicts the cross‐section of fund returns. This predictability is more pronounced in funds that experience inflows with more negative climate‐related news and in funds with more skilled managers, consistent with the ‘smart money’ effect. Our results are not driven by sustainable funds, past long‐term or recent fund performance, or funds from the largest fund families. These findings offer implications for understanding the impact of climate concerns on mutual fund performance.