Low Carbon Mutual Funds*Marco Ceccarelli1, Stefano Ramelli2, and Alexander F. Wagner31Maastricht University, The Netherlands, 2University of St. Gallen and Swiss Finance Institute,Switzerland and 3University of Zurich, CEPR, ECGI, and Swiss Finance Institute, SwitzerlandAbstractClimate change poses new challenges for portfolio management. In our not-yet-lowcarbon world, investors face a trade-off between minimizing their exposure toclimate risks and maximizing the benefits of portfolio diversification. This articleinvestigates how investors and financial intermediaries navigate this trade-off. Afterthe release of Morningstar’s novel carbon risk metrics in April 2018, mutual fundslabeled as “low carbon” experienced a significant increase in investor demand, es-pecially those with high risk-adjusted returns. Fund managers actively reduced theirexposure to firms with high carbon risk scores, especially stocks with returns thatcorrelated more with the funds’ portfolios and were thus less useful for diversifica-tion. These findings shed light on whether and how climate-related information canre-orient capital flows in a low carbon direction.Keywords: Behavioral finance, Portfolio management, Climate change, Investor preferences,Mutual funds, Sustainable financeJEL classification: D03, G02, G12, G23Received June 3, 2021; accepted March 5, 2023 by Editor Marcin Kacperczyk.*We thank seminar participants at Maastricht University, European Commission’s Joint ResearchCenter, Queen Mary University, University of Zurich, University of Liechtenstein, University of St.Gallen, Corporate Finance Webinar, University of Mannheim, the 2019 CEPR European SummerSymposium in Financial Markets (evening session), the 2019 GRASFI conference, the 2019 HelsinkiFinance Summit, the 2019 PRI academic conference, the 2020 UZH Sustainable Finance conference,the 2020 Western Finance Association conference, and the ESSEC-Amundi Green Finance webinar foruseful comments. We are also grateful to Marcin Kacperczyk (editor), two anonymous co-editors, ananonymous referee, Marie Brie`re, Miguel Ferreira, Stefano Giglio, Samuel Hartzmark, AugustinLandier, Steven Ongena, Melissa Prado, Bert Scholtens, Paul Smeets, Lucian Taylor, Michael Viehs,and Stefan Zeisberger for useful suggestions. We thank Hortense Bioy and Sara Silano at Morningstarfor helpful clarifications. A.F.W. thanks the University of Zurich Research Priority Program “Financialmarket regulation” for financial support. The authors declare that they have no relevant or materialfinancial interests that relate to the research described in this article.VC The Author(s) 2023. Published by Oxford University Press on behalf of the European Finance Association.This is an Open Access article distributed under the terms of the Creative Commons Attribution License (https://creativecom-mons.org/licenses/by/4.0/), which permits unrestricted reuse, distribution, and reproduction in any medium, p...
