Climate Salience and the Demand for Green Stocks by Mutual Funds

Summary:

This study is the second output of the Research Chair «Measuring and Managing Climate Risks in Investment Portfolios» established at EDHEC-Risk Climate Impact Institute with the support of Amundi. Building upon our previous research, which explored the relationship between climate change news and equity market returns, this new study shifts focus to how climate awareness influences the investment decisions of mutual fund managers worldwide.

While high-frequency algorithmic trading dominates intraday market activity, active mutual fund managers remain key players in determining asset prices over longer horizons. Their investment decisions, which reflect their interpretation of the latest available information, influence market trends and capital allocation on a fundamental level. This makes them central to understanding how climate-related concerns are integrated into market dynamics. While sustainable investing has grown in prominence, the mechanisms through which mutual fund managers respond to significant climate events—and how these responses influence trading and asset valuations—remain surprisingly underexplored. Investigating these dynamics provides critical insights into the link between climate awareness, investment behaviour, stock performance, and the broader integration of climate concerns into financial markets.

This study examines how significant climate events, particularly abnormally high temperatures, affect the trading activity of active fund managers. The findings reveal that these events lead sustainable fund managers to rebalance their portfolios in favour of companies with lower greenhouse gas emissions. This shift contributes to the persistent outperformance of the stocks of these issuers, reflecting rational updates in the perception of climate risks and opportunities rather than temporary overreactions. Moreover, these events are also found to amplify investor flows into sustainable funds, reinforcing the highlighted trends.

Using a causal inference framework and a dataset covering over 5,000 actively managed mutual funds across 24 countries, this study provides robust evidence that mutual fund managers play an active role in the integration of climate concerns into financial market dynamics and asset prices and paves the way for future research on climate-related investment strategies.