Low Carbon Mutual Funds

82 Pages Posted: 19 Feb 2020 Last revised: 7 Jun 2023

See all articles by Marco Ceccarelli

Marco Ceccarelli

VU University Amsterdam

Stefano Ramelli

University of St. Gallen - School of Finance; Swiss Finance Institute

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: March 6, 2023


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

JEL Classification: D03, G02, G12, G23

Suggested Citation

Ceccarelli, Marco and Ramelli, Stefano and Wagner, Alexander F., Low Carbon Mutual Funds (March 6, 2023). Forthcoming, Review of Finance, 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

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV

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

Stefano Ramelli

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St. Gallen, 9000

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4

Alexander F. Wagner (Contact Author)

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

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

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

European Corporate Governance Institute (ECGI) ( email )

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

Swiss Finance Institute ( email )


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

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