Low Carbon Mutual Funds
Open accessAbstract
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 article 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.
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“In performance-related regressions, we also control the impact of Morningstar star rating on fund performance by including monthly innovation in the star rating, i.e., an upgrade or a downgrade in the rating (Del Guercio and Tkac, 2008, Ceccarelli et al., 2021).”
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- Authors
- Ceccarelli, M., Ramelli, S., & Wagner, A. F.
- Affiliations
- Maastricht University (NL)
- University of St.Gallen (CH)
- University of Zurich (CH)
- Corresponding author
- Wagner, Alexander F
- Venue
- Review of Finance
- Publisher
- Oxford University Press (OUP)
- Published
- 2023-04-04
- Volume
- 28
- Issue
- 1
- Pages
- 45-74
- ISSN
- 1382-6662 (ISSN-L)
- 1572-3097
- 1573-692X
- OpenAlex
- W4362548929
- Cited by
- 224
- References
- 10
- Citations by year
- 2026: 46 · 2025: 65 · 2024: 46 · 2023: 27 · 2022: 24 · 2021: 9 · 2020: 5 · 2019: 2
- FWCI
- 38.76
- Type
- journal article
- Language
- en
- Open access
- hybrid
- doi.org
- Licence
- Locations
- European Finance Review (publishedVersion, cc-by)
- Research Publications (Maastricht University) (publishedVersion, cc-by)
- VU Research Portal (publishedVersion, other-oa)
- Alexandria (UniSG) (University of St.Gallen) (acceptedVersion)
- Zurich Open Repository and Archive (University of Zurich) (acceptedVersion, cc-by-nc-nd)
- RePEc: Research Papers in Economics (submittedVersion)
- Alexandria (UniSG) (University of St.Gallen) (submittedVersion, other-oa)
- Zurich Open Repository and Archive (University of Zurich) (submittedVersion, cc-by)
- Data Archiving and Networked Services (DANS) (submittedVersion, other-oa)
- Zurich Open Repository and Archive (University of Zurich)
- Topics
- Social Sciences › Economics, Econometrics and Finance › Finance › Sustainable Finance and Green Bonds
- Social Sciences › Economics, Econometrics and Finance › Finance › Financial Markets and Investment Strategies
- Social Sciences › Business, Management and Accounting › Strategy and Management › Corporate Social Responsibility Reporting
- Keywords
- climate risk, Morningstar, portfolio diversification, fund managers, investor demand, climate change, capital flows, risk-adjusted returns
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