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Low-carbon mutual funds

Alexander F. Wagner, Marco Ceccarelli and Stefano Ramelli

No 13599, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Climate change poses new challenges for portfolio management. In our not-yet-low carbon world, investors face a trade-off between minimizing their exposure to climate risks and maximizing the benefits of portfolio diversification. This paper investigates how investors and financial intermediaries navigate this trade-off. After the release of Morningstar's novel carbon risk metrics in April 2018, mutual funds labeled as ``low carbon'' experienced a significant increase in investor demand, especially those with high risk-adjusted returns. Fund managers actively reduced their exposure to firms with high carbon risk scores, especially stocks with returns that correlated more with the funds' portfolios and were thus less useful for diversification. These findings shed light on whether and how climate-related information can re-orient capital flows in a low carbon direction.

Keywords: Behavioral finance; Climate change; Eco-labels; Investor preferences; Mutual funds; Sustainable finance (search for similar items in EconPapers)
JEL-codes: D03 G02 G12 G23 (search for similar items in EconPapers)
Date: 2022-05
New Economics Papers: this item is included in nep-ene, nep-env and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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