Climate policy regime change and mutual fund flows: Insights from the 2020 US election

President Biden campaigned and was elected on a bold “clean energy revolution,” a pledge that drastically reshaped expectations surrounding US climate policy. We study how mutual fund investors respond to this significant shift in environmental priorities. We find that low-carbon funds attract (or retain) $15 billion more investments than high-carbon funds during the three months after the 2020 election compared with the three months before. We also find that low-carbon funds underperform high-carbon funds by between 0.47 % and 0.89 % a month during the same period. These results indicate that Biden's election heightens climate transition risk awareness, prompting investors to hedge this risk by investing more in low-carbon funds and receiving lower returns. The flow effect is more pronounced among retail investors, emphasizing their increased recognition of climate transition risk. We also uncover an interesting clientele effect: investors in low-carbon funds consider continuous carbon risk measures, whereas investors in high-carbon funds do not. Furthermore, our analysis of a US-only fund sample reveals that sensitivity to climate risk is insignificant in 2018 after Morningstar first published low-carbon metrics (unlike Ceccarelli, Ramelli, & Wagner, 2024) but becomes particularly significant following the 2020 election.