Sustainable Investments in Times of Crisis

Sammanfattning: This paper examines the effect of Covid-19 on green and brown funds in the Swedish Premium Pension System (PPS). We apply the methodology derived in Berk and van Binsbergen (2015) in a difference-in-difference model with time-fixed effects to estimate the average effect of Covid-19 on green funds for both value added and conventional alpha measures. We find that, prior to the pandemic, green funds managed more money relative to brown funds, but green fund managers were compensated less compared to their conventional counterparts because of lower fees. After the pandemic, the relative difference in assets under management grew, and managerial compensation for green funds increased accordingly. Our results, obtained using three benchmarking methods to calculate abnormal return, suggest a relative decrease in gross alpha for green funds after the outbreak of Covid-19, primarily due to substantial inflows of capital. However, the effect on gross alpha is not statistically significant. We document a relative increase in value added for green funds during the pandemic, which is primarily attributable to larger cross-sectional differences in assets under management. Our findings contribute to a diverse body of literature on sustainable investments in crisis and provide Swedish pension savers with novel insights.