Cost and performance of carbon risk in socially responsible mutual funds

Abstract

Investors and other financial actors are attracted by the role of socially responsible (SR) mutual funds in the transition to a low-carbon economy. In response to the demand for more information, Morningstar reported the level of carbon risk of funds by using the following indicators: Carbon Risk, Carbon Management, Carbon Operations risk and Carbon Exposure. Dealing with a sample of 3370 equity SR mutual funds worldwide from 2017 to 2021, this study analyzes the relationships between these indicators and the expense ratio and performance of the funds. In general, the results point to funds with lower carbon scores that have lower fees and perform better than those with higher scores. Considering the effects of the COVID-19 crisis, this evidence holds true for most of the sample period analyzed. With a spatial analysis, although the evidence generally holds, regional differences are found. Thus, funds that invest in the USA and Canada are on average cheaper and show lower carbon scores, while funds that are oriented to other areas, such as emerging markets, are more expensive and show higher scores. In summary, there is good news for the utility function of the investor and the planet: Green investing is cheaper and better.

Keywords

• sustainability
• environmental
• carbon risk
• mutual fund
• performance
• covid-19