Green Mutual Funds: Investigating the Impact of Carbon Emissions Performance on Financial Returns

Abstract

This paper explores the relationship between carbon emissions performance and financial returns of green mutual funds by analyzing data from 90 green1 mutual funds from September 2018 to December 2023. Our study controls for common fund characteristics such as age, fees, size, sustainability rating, active share, and historical risk-adjusted performance. Our findings reveal that carbon emission performance, as measured by Morningstar’s Carbon Risk Score, does not significantly impact the financial performance of green mutual funds. This outcome may stem from the market already factoring in the associated carbon risks, or investors relying on alternative metrics beyond the Carbon Risk Score to assess fund performance.