DP13599 When investors call for climate responsibility, how do mutual funds respond?

Author(s): Marco Ceccarelli, Stefano Ramelli, Alexander F Wagner
Publication Date: March 2019
Date Revised: March 2019
Keyword(s): behavioral finance, climate change, eco-labels, investor preferences, Mutual funds, Sustainable Finance
JEL(s): D03, G02, G12, G23
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13599

In April 2018, the investment platform and financial advisor Morningstar introduced a new eco-label for mutual funds, the Low Carbon Designation (LCD). The unexpected release of this label induced responses by (1) investors and (2) mutual funds. First, investors flocked to funds labeled as Low Carbon. Through the end of 2018, such funds enjoyed a 3.1% increase in assets compared to otherwise similar funds. This effect was distinct from that of more generic sustainability ratings ("Globes"), and it reversed for funds that lost the label in August or November 2018. Second, managers of just-missing funds adjusted their holdings towards lower carbon risk and lower fossil fuel involvement, the two criteria used to assign the LCD. Both the rewards-for-LCD and the moving-towards-LCD effects are stronger for European funds, retail funds, funds with weak financial performance, and low-sustainability funds. Overall, the findings suggest that as investors become more sensitive to the topic of climate change, financial intermediaries also use existing investment vehicles to respond to the increasing demand for climate-conscious investment products.