How Do Mutual Funds Respond to Salient Pollution Events?

ABSTRACT We examine how salient chemical spill incidents influence mutual fund portfolio allocations. Using a sample of 36 major chemical spills between 2000 and 2019, we find that funds located in the same designated market area as a spill increase their portfolio ESG scores in the year following the incident, primarily by divesting from low‐ESG firms. This response is particularly pronounced for funds with a higher share of socially responsible investors and for funds located in Democratic‐leaning counties and regions with stronger pro‐environmental attitudes. These patterns indicate that social and reputational considerations significantly shape fund managers’ portfolio responses to local environmental shocks.