Abstract

In response to Morningstar’s release of carbon risk (CR) scores in May 2018, (environmentally) sustainable mutual funds in the U.S. showed a greater reduction in their portfolio CR relative to conventional funds. The observed causal impact of this third-party disclosure is consistent with the funds’ primary investment objectives. Differences in fund names, potentially driven by marketing considerations, appear irrelevant to the behavior of sustainable funds. Conventional funds that are signatories to the UN’s Principles for Responsible Investment (PRI) or those with secondary sustainability mandates behave more like other conventional funds rather than sustainable funds. These funds appear relatively insensitive to disclosures as their sustainability considerations are superseded by other primary investment criteria. Fiduciary and legal bonding influences fund managers’ response to sustainability disclosures. Sustainable funds lower their CR score by reducing exposure to fossil fuels, not by increasing exposure to renewables.