Climate Sensitivity and Mutual Fund Performance
50 Pages Posted: 6 May 2021 Last revised: 13 May 2022
Date Written: May 5, 2021
In the presence of rising concern about climate change that potentially affects risk and return of investors’ portfolio companies, active investors might have dispersed climate risk exposures. We compute mutual fund covariance with market-wide climate change news index and find that high (positive) climate beta funds outperform low (negative) climate beta funds by 0.24% per month on a risk-adjusted basis. High climate beta funds tilt their holdings toward stocks with high potential to hedge against climate change. In the cross section, such stocks yield higher excess returns, which are driven by greater pricing pressure and superior financial performance over our sample period.
Keywords: mutual funds, climate change, fund-level climate beta, stock-level climate beta, returns.
JEL Classification: G11, G12, G23, Q5
Suggested Citation: Suggested Citation