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Low-carbon mutual funds

Author

Listed:
  • Wagner, Alexander F.
  • Ceccarelli, Marco
  • Ramelli, Stefano

Abstract

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.

Suggested Citation

  • Wagner, Alexander F. & Ceccarelli, Marco & Ramelli, Stefano, 2022. "Low-carbon mutual funds," CEPR Discussion Papers 13599, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:13599
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    References listed on IDEAS

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    Cited by:

    1. Alexander Guzmán & Cristian Pinto-Gutiérrez & María-Andrea Trujillo, 2020. "Attention to Global Warming and the Success of Environmental Initial Coin Offerings: Empirical Evidence," Sustainability, MDPI, vol. 12(23), pages 1-16, November.
    2. Amparo Soler-Domínguez & Juan Carlos Matallín-Sáez & Diego Víctor de Mingo-López & Emili Tortosa-Ausina, 2020. "Social responsible mutual funds and lowcarbon economy," Working Papers 2020/15, Economics Department, Universitat Jaume I, Castellón (Spain).
    3. Venturini, Alessio, 2022. "Climate change, risk factors and stock returns: A review of the literature," International Review of Financial Analysis, Elsevier, vol. 79(C).
    4. Amparo Soler‐Domínguez & Juan Carlos Matallín‐Sáez & Diego Víctor de Mingo‐López & Emili Tortosa‐Ausina, 2021. "Looking for sustainable development: Socially responsible mutual funds and the low‐carbon economy," Business Strategy and the Environment, Wiley Blackwell, vol. 30(4), pages 1751-1766, May.

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    More about this item

    Keywords

    Behavioral finance; Climate change; Eco-labels; Investor preferences; Mutual funds; Sustainable finance;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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