Low-carbon Mutual Funds

Low-carbon Mutual Funds

Marco Ceccarelli, Stefano Ramelli, Alexander Wagner

Series number :

Serial Number: 
659/2020

Date posted :

March 19 2020

Last revised :

February 22 2021
SSRN Share

Keywords

  • Behavioral Finance • 
  • climate change • 
  • eco-labels • 
  • investor preferences • 
  • mutual funds • 
  • Sustainable Finance

Climate change poses new challenges for portfolio management. Investors face a trade-off between minimizing climate risk exposure and maximizing the risk benefits of portfolio diversification in a not-yet-low-carbon world. This paper investigates investors' and financial intermediaries' responses to this risk-risk trade-off.

We analyze the fund flows and position changes of a large sample of European and US mutual funds after the release of Morningstar's carbon risk metrics in April 2018, a shock to the availability of information on climate transition risks. Funds labeled as "low carbon" experienced a significant increase in investor demand, especially those compensating for their under-diversification with high risk-adjusted returns. Fund managers actively reduced their exposure to high-carbon risk firms, especially when less costly for portfolio diversification. These findings shed light on whether and how climate-related information can re orient capital flows in a low-carbon direction.

Authors

Real name:
Marco Ceccarelli
Real name:
Stefano Ramelli