Low-carbon Mutual Funds

67 Pages Posted: 19 Feb 2020 Last revised: 6 May 2022

See all articles by Marco Ceccarelli

Marco Ceccarelli

Maastricht University - Department of Finance

Stefano Ramelli

University of Zurich - Department of Banking and Finance

Alexander F. Wagner

University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swiss Finance Institute

Multiple version iconThere are 2 versions of this paper

Date Written: May 3, 2022

Abstract

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.

Keywords: Behavioral finance, climate change, eco-labels, investor preferences, mutual funds, sustainable finance

JEL Classification: D03, G02, G12, G23

Suggested Citation

Ceccarelli, Marco and Ramelli, Stefano and Wagner, Alexander F., Low-carbon Mutual Funds (May 3, 2022). Swiss Finance Institute Research Paper No. 19-13, European Corporate Governance Institute – Finance Working Paper No. 659/2020, Available at SSRN: https://ssrn.com/abstract=3353239 or http://dx.doi.org/10.2139/ssrn.3353239

Marco Ceccarelli

Maastricht University - Department of Finance ( email )

Tongersestraat 53
Maastricht, 6211 LM
Netherlands

HOME PAGE: http://https://sites.google.com/view/marcoceccarelli

Stefano Ramelli

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland
+41446342953 (Phone)

HOME PAGE: http://https://sites.google.com/view/stefanoramelli/about

Alexander F. Wagner (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland
+41 44 634 3963 (Phone)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Swiss Finance Institute ( email )

Switzerland

HOME PAGE: http://www.alex-wagner.com

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