Working Paper: CEPR ID: DP13599
Authors: Marco Ceccarelli; Stefano Ramelli; Alexander F. Wagner
Abstract: 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 paper 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.
Keywords: Behavioral Finance; Climate Change; Ecolabels; Investor Preferences; Mutual Funds; Sustainable Finance
JEL Codes: D03; G02; G12; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| assignment of the LCD label (Y20) | net fund flows (F21) |
| higher risk-adjusted performance (G11) | net fund flows (F21) |
| existing sustainability ratings (Q01) | net fund flows (F21) |
| assignment of the LCD label (Y20) | risk-adjusted performance (C52) |