Carbon Risk and Swedish Mutual Funds

Abstract: This paper analyzes sustainable investments of Swedish mutual funds. Morningstar’s CarbonRisk Score (CRS) - funds exposure to a future of low-carbon economy - is analysed in termsof returns, management fees and flows. The CRS measure was introduced March 2018 with ahistorical series from March 2017, without the market being aware. Analysing CRS before theintroduction is therefore greenwashing-bias free. An empirical approach with regressions findthat there is a payoff between return and alignment with a low-carbon economy future, CRS.A 1% increased abnormal return causes a 0.13 standard deviations higher CRS. Regressionsalso find no relationship between management fee and CRS. A correlation between flow andCRS is found but no causality. The shown payoff between return and CRS implies that fundswhich are well-performing are less sustainable. Fund managers maximising their returnthereby lead to unsustainable investments. To handle this, a policy of tax relief or subsidyshould be implemented for investing sustainable. The tax relief or subsidy should beproportional to the increased return renounced when investing sustainable.