Low-carbon Mutual Funds

Abstract

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.