Looking for sustainable development: Socially responsible mutual funds and the low‐carbon economy

Abstract

Sustainable investment responds to demands for carbon and climate-neutral societies. To address the urgency around climate change and provide investors with more qualified information, Morningstar has developed the Low Carbon Designation (LCD) to indicate that the companies held in a portfolio are in general alignment with the transition to a low-carbon economy. The designation is given to portfolios that have low carbon risk and fossil fuel exposure scores. The present study builds on the LCD by examining the relationship between these scores and financial performance. With this aim, we analyze 3920 socially responsible mutual funds from across the world.Results show differences in financial performance according to scores and investment areas. We find evidence that funds considered to have higher levels of sustainability achieved better performance than funds with higher exposure to companies involved in carbon and fossil fuel industries. We provide insights on the informativeness of these new scores with a focus on climate change and their relevance in helping investors to identify climate-aware funds. This study highlights the importance of introducing strategies to develop green finance; the analysis confirms that sustainability improves performance. Finally, the LCD indicator is shown to be relevant for making fairer comparisons among socially responsible funds and, ultimately, for developing low-carbon economies.

Low carbon transition risk in mutual fund portfolios: Managerial involvement and performance effects

“…Empirical tests from different regression specifications reveal that fund portfolios with low CRS ratings are associated with better risk‐adjusted return performances in the following year‐quarter, indicating that funds concerned about low carbon transition risks are more desirable to performance‐chasing investors, given that the portfolio performance of those funds is better than that of funds with greater portfolio exposure to carbon risk. This evidence is consistent with that of Dimson et al (2015), Ji et al (2021) and Soler‐Domínguez et al (2021), who find a positive effect of sustainable stocks or mutual funds on performance.…”

Between impact and returns: Private investors and the sustainable development goals

“…Corporate social responsibility (CSR) is a an important topic for many stakeholders (Aguinis & Glavas, 2012; Andreu et al, 2015; Campbell, 2007; Ruiz et al, 2021; Schiehll & Kolahgar, 2021; Soler‐Domínguez et al, 2021) and has a positive influence on a company's ability to attract investors (Flammer, 2012; Kim et al, 2021; Mackey et al, 2007; McGuire et al, 1988). Market reports illustrate that investors increasingly integrate social and environmental aspects in their investment appraisals (Cubas‐Díaz & Sedano, 2018; GSIA, 2018; Swiss Sustainable Finance, 2020).…”

Comparing the uncomparable? An investigation of car manufacturers' climate performance

“…These data are used by various actors, such as nonfinancial rating agencies, to compare the performance of different organizations and establish rankings (Boiral et al, 2021; Chelli & Gendron, 2013; Escrig‐Olmedo et al, 2019). A growing number of financial products—such as low‐carbon investments, which have developed very rapidly in recent years—depend on the existence and reliability of this type of ranking (Louche et al, 2019; Soler‐Domínguez et al, 2021). Research in the field of corporate sustainability is also increasingly interested in climate performance, climate disclosure practices and rankings based on greenhouse gas (GHG) emissions (Hahn et al, 2015; Kolk et al, 2008; Rekker et al, 2021; Yu et al, 2016).…”