Low Carbon Mutual Funds

Marco Ceccarelli, Stefano Ramelli, Alexander F. Wagner*

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

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 article 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.
Original languageEnglish
Pages (from-to)45-74
Number of pages30
JournalReview of Finance
Volume28
Issue number1
Early online date1 Apr 2023
DOIs
Publication statusPublished - Jan 2024

JEL classifications

  • d03 - Behavioral Economics: Underlying Principles
  • g02 - Behavioral Finance: Underlying Principles
  • g12 - "Asset Pricing; Trading volume; Bond Interest Rates"
  • g23 - "Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors"

Keywords

  • Behavioral finance
  • Portfolio management
  • Climate change
  • Investor preferences
  • Mutual funds
  • Sustainable finance
  • CLIMATE
  • INVESTMENT
  • RISK

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