Climate Uncertainty and Investor Learning in Sustainable Funds

47 Pages Posted: 1 May 2023 Last revised: 3 May 2023

See all articles by Sara Ali

Sara Ali

Auckland University of Technology

Ihsan Badshah

Auckland University of Technology; Auckland Center for Financial Research(ACFR)

Riza Demirer

Southern Illinois University Edwardsville - Department of Economics & Finance; Economic Research Forum (ERF)

Prasad Hegde

Auckland University of Technology; Auckland Center for Financial Research(ACFR)

Lavinia Rognone

University of Edinburgh Business School

Date Written: May 3, 2023

Abstract

This paper presents a novel take on the effect of uncertainty on investor learning about managerial skills by examining the fund flow-performance relationship in ESG rated funds in the context of climate uncertainty. Utilizing a large sample of mutual funds domiciled in Australia and New Zealand and recently developed transition and physical climate risk indexes for the Australia-Oceania region, we show that investor learning regarding manager skills is affected by not only the nature of climate uncertainty faced by decision makers, but also the sustainability ratings of the funds under consideration. While the response of fund flows to past performance is found to be stronger for funds with higher sustainability scores, we show that high climate risk dampens investors’ ability to process information when it comes to funds with lower sustainability scores, thus hindering their ability to differentiate fund manager skill from luck. Our findings suggest that investor learning could be enhanced by the ESG performance of funds even under high uncertainty. We underscore the informational value captured by ESG ratings from a novel angle, particularly during periods of higher climate uncertainty. Our findings have implications for the managed fund industry and the information asymmetries that may arise between fund managers and investors.

Keywords: Climate risk, Physical and transition risk, Investor learning, Fund flow-performance sensitivity

JEL Classification: D82, D83, G11, G23, G24, Q54

Suggested Citation

Ali, Sara and Badshah, Ihsan and Demirer, Riza and Hegde, Prasad and Rognone, Lavinia, Climate Uncertainty and Investor Learning in Sustainable Funds (May 3, 2023). Available at SSRN: https://ssrn.com/abstract=4432798 or http://dx.doi.org/10.2139/ssrn.4432798

Sara Ali

Auckland University of Technology

Private Bag 1142
Auckland, 1142
New Zealand

Ihsan Badshah

Auckland University of Technology ( email )

3 Wakefield Street
Private Bag 92006
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New Zealand
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+64 9 219940 (Fax)

Auckland Center for Financial Research(ACFR)

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WF810
Auckland Central, 1010

Riza Demirer (Contact Author)

Southern Illinois University Edwardsville - Department of Economics & Finance ( email )

Department of Economics & Finance
Alumni Hall 3145
Edwardsville, IL 62026-1102
United States
(618) 650-2939 (Phone)
(618) 650-3047 (Fax)

HOME PAGE: http://www.siue.edu/~rdemire/

Economic Research Forum (ERF) ( email )

21 Al-Sad Al-Aaly St.
(P.O. Box: 12311)
Cairo, Cairo
Egypt

HOME PAGE: http://erf.org.eg/affiliates/riza-demirer-3/

Prasad Hegde

Auckland University of Technology ( email )

42 Wakefield Street
WF810
Auckland Central, 1010
New Zealand

HOME PAGE: http://https://academics.aut.ac.nz/prasad.hegde

Auckland Center for Financial Research(ACFR) ( email )

42 Wakefield Street
WF810
Auckland Central, 1010

Lavinia Rognone

University of Edinburgh Business School ( email )

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