Cost and performance of carbon risk in socially responsible mutual funds

Investors and other financial actors are attracted by the role of socially responsible (SR) mutual funds in the transition to a low-carbon economy. In response to the demand for more information, Morningstar reported the level of carbon risk of funds by using the following indicators: Carbon Risk, Carbon Management, Carbon Operations risk and Carbon Exposure. Dealing with a sample of 3370 equity SR mutual funds worldwide from 2017 to 2021, this study analyzes the relationships between these indicators and the expense ratio and performance of the funds. In general, the results point to funds with lower carbon scores that have lower fees and perform better than those with higher scores. Considering the effects of the COVID-19 crisis, this evidence holds true for most of the sample period analyzed. With a spatial analysis, although the evidence generally holds, regional differences are found. Thus, funds that invest in the USA and Canada are on average cheaper and show lower carbon scores, while funds that are oriented to other areas, such as emerging markets, are more expensive and show higher scores. In summary, there is good news for the utility function of the investor and the planet: Green investing is cheaper and better.

Do capital markets reward corporate climate change actions? Evidence from the cost of debt

As a result of recurring natural disasters caused by climate change, firms are under enormous pressure to reconsider their environmental footprints. However, whether or not investors reward firms' climate change actions remains a topic of considerable debate. Using a sample of S&P 500 companies over the period 2005-2020, we hypothesise and find a significant negative relationship between climate change actions and the cost of debt, indicating that investors indeed reward corporate climate efforts in the form of lower cost funds. This relationship exists in both environmentally sensitive and non-sensitive industries and remains negative and statistically significant even after controlling for the impact of the ongoing pandemic (COVID-19). The findings are robust to the use of alternative measures for our variables, alternative estimation methods and after controlling for endogeneity issues. We interpret our findings within the decision-usefulness and stakeholder-agency theories that suggest that non-financial information on firms' environmental performance is becoming increasingly important when borrowers' creditworthiness is assessed. Our study offers important regulatory and academic policy implications.

The price of carbon risk: Evidence from China's bond market

Using a 2009–2019 sample of Chinese bond issuers, we examine the effect of carbon risk on bond financing costs. Relative to low carbon risk issuers, high carbon risk issuers have substantially larger bond credit spreads, mainly because their credit risk is greater and they invest the funds in non-green projects. This positive relationship is more pronounced for issuers with financing constraints, those not making a green transition and those in cities with stringent environmental regulations. We find a reversed effect during the COVID-19 pandemic. However, China's carbon peak and carbon neutral goals have renewed the focus on carbon risk. Carbon risk also causes bond issuers to scale back production and negatively affects their likelihood of receiving long-term financial support. Our findings suggest that investors consider carbon risk and charge a corresponding risk premium. © 2022 Sun Yat-sen University