Mutual funds and climate news

Summary

Focus

In the past decade, public attention to climate issues has increased significantly. We explore this trend's implication for the financial industry, specifically examining the relationship between climate-related news and mutual fund activities. We focus on "green funds" – mutual funds that invest in environmentally sustainable companies. We investigate how changes in public attention to climate issues influence investment flows into these green funds compared with other funds and examine the effects on portfolio decisions.

Contribution

Our research contributes to understanding how increased public awareness of climate issues affects investors' strategies, particularly towards green mutual funds. It underscores the role of green mutual funds in reallocating capital towards low-polluting firms. Additionally, our analysis disentangles investors' responses to climate news related to physical risks (eg extreme weather events) and transition risks (eg policy changes for sustainability), revealing significant variations in responses.

Findings

Climate news leads to significant and sustained inflows into green funds compared with other funds. This effect persists for up to four months after a news event, showing that public awareness has a long-lasting influence on investment strategies. Furthermore, green funds respond more strongly than non-green funds to climate news by reducing their investments in high-polluting firms and increasing their exposure to low-polluting firms. This indicates that green funds are more sensitive to climate risks and adjust their portfolios accordingly. Overall, our findings suggest that rising climate awareness drives investment towards greener companies through the mutual fund industry, thereby supporting the transition to a more sustainable economy.

Abstract

In the context of rising public awareness of climate change, the proliferation of green mutual funds reflects expectations of their contribution to a sustainable economic transition. This paper investigates the effect of climate news on mutual funds' flows, and on their portfolio allocation decisions. Using detailed flow- and holdings- level data, we observe that heightening climate news results in significantly larger capital inflows into green funds versus their non-green counterparts. Furthermore, we show that, in reaction to climate news, green funds decrease their exposure to high-polluting firms relative to low-polluting firms more than non-green funds do. These results suggest that increasing public awareness boosts capital re-allocation towards green funds and this, in turn, potentially fosters investment relocation towards more environmentally-friendly companies.

JEL classification: G11, G23, Q54

Keywords: mutual funds, climate news, green finance