Carbon Risk Exposure in the Mutual Fund Industry

55 Pages Posted: 21 Aug 2021 Last revised: 2 Mar 2023

See all articles by Huan Kuang

Huan Kuang

Bryant University

Bing Liang

University of Massachusetts Amherst - Department of Finance

Date Written: August 1, 2022

Abstract

We construct a novel carbon risk measure to assess mutual funds’ carbon risk exposure based on mutual fund holding data and further explore how such exposure affects mutual funds’ performance, risk, and flows. First, we find carbon risk negatively predicts fund future raw and risk-adjusted performance. Second, we find that carbon risk correlates with different risk factors and funds with higher carbon risk exposure are associated with higher unexplained risk. Third, we show that carbon risk adversely affects future fund flows. Mutual funds with higher carbon risk exposure experience a negative flow shock in the subsequent period. Meanwhile, when social sentiment on climate change increases, carbon risk affects fund flows more negatively. Further analyses show that these findings only exist in institutional funds, suggesting that institutional investors pay more attention to climate change issues than retail investors do. Finally, we show that mutual funds’ carbon risk exposure is not fully captured in traditional Environmental, Social, and Governance (ESG) measures.

Keywords: Climate change; Carbon risk; Mutual fund performance; Mutual fund flow; Socially responsible investing

JEL Classification: G11, G14, G23

Suggested Citation

Kuang, Huan and Liang, Bing, Carbon Risk Exposure in the Mutual Fund Industry (August 1, 2022). Available at SSRN: https://ssrn.com/abstract=3750244 or http://dx.doi.org/10.2139/ssrn.3750244

Huan Kuang (Contact Author)

Bryant University ( email )

1150 Douglas Pike
Smithfield, RI 02917
United States

HOME PAGE: http://www.bryant.edu/academics/faculty/kuang-huan

Bing Liang

University of Massachusetts Amherst - Department of Finance ( email )

Amherst, MA 01003
United States

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