DP13599 Low-carbon mutual funds

Author(s): Marco Ceccarelli, Stefano Ramelli, Alexander F Wagner
Publication Date: March 2019
Date Revised: February 2021
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

Low-carbon mutual funds allow investors to purchase lower exposure to climate change risk at the cost of lower sectoral diversification. On balance, this proposition proves to be appealing for investors, as seen from the effect on fund flows of the introduction of Morningstar's "Low Carbon Designation", and of subsequent updates. Active funds that missed the label at its initial release later shifted their holdings towards less carbon-intensive firms. The competition of intermediaries for investment flows along climate performance can thus have far-reaching consequences for investors.