DP13599 Low-carbon mutual funds

Author(s):	Marco Ceccarelli, Stefano Ramelli, Alexander F Wagner
Publication Date:	March 2019
Date Revised:	April 2020
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

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.