When Investors Call for Climate Responsibility, How Do Mutual Funds Respond?

Abstract

This paper provides evidence that the release of climate-related information can contribute to a "greening" of financial flows. We exploit the introduction in April 2018 of an eco-label for mutual funds, the Low Carbon Designation (LCD), by the investment platform Morningstar. The release of this label induced responses by (1) investors and (2) mutual funds. First, investors flocked to funds labeled as Low Carbon. Through the end of 2018, such funds enjoyed a 2% increase in assets compared to otherwise similar funds. Second, managers of active funds that missed the label at its initial release shifted their holdings to more climate-friendly firms, in the attempt of obtaining the designation in subsequent updates. Overall, the findings indicate that financial intermediaries actively compete for flows driven by the increasing demand for climate-conscious investment products.

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

JEL Classification: D03, G02, G12, G23