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Discussion Paper Details

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Title: Low-carbon mutual funds

Author(s): Marco Ceccarelli, Stefano Ramelli and Alexander F Wagner

Publication Date: March 2019

Keyword(s): behavioral finance, climate change, eco-labels, investor preferences, Mutual funds and Sustainable Finance

Programme Area(s): Financial Economics

Abstract: We show that mutual funds compete for climate-conscious investment flows. In April 2018, Morningstar introduced a climate-focused label for mutual funds. The release of the "Low Carbon Designation" induced reactions on both the demand and supply sides of the market. First, investors flocked to funds receiving this eco-label. Second, active funds that missed the label at its initial release responded to the new incentive by shifting their holdings towards more climate-friendly firms. In sum, climate-related information can trigger competition by financial intermediaries along their climate performance. However, the resulting portfolio shifts may also expose investors to higher idiosyncratic risks.

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Bibliographic Reference

Ceccarelli, M, Ramelli, S and Wagner, A. 2019. 'Low-carbon mutual funds'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13599