Low Carbon Mutual Funds

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 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…