Do investors value sustainability? Evidence from carbon risk ratings and mutual fund flows

Abstract

I study US mutual fund investors’ response to the introduction of new information on fund sus-tainability by examining fund flows of US mutual funds immediately after the publication of Morningstar’s Portfolio Carbon Risk metrics in May 2018. I find evidence that investors collec-tively put a positive value on low carbon risk funds. Regressing normalised fund flows on Morn-ingstar’s Carbon Risk Score over the time of the publication gives a coefficient of -0.9, indicating that each Carbon Risk Score unit accounts for a decrease of -0.9 percentiles in monthly flows. Inconsistent with previous research on the topic, I do not find discrete measures to have a great-er influence on fund flows than continuous measures.