When Investors Call for Climate Responsibility, How Do Mutual Funds Respond?

Abstract

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.