Keeping Promises? Carbon Risk Disclosure and Mutual Fund Portfolios

Morningstar’s disclosure of fund level carbon risk (CR) scores reveals that pre-disclosure (environmentally) sustainable funds in the US had lower portfolio CR scores than convention funds and showed a further significant relative reduction post-disclosure, consistent with a causal impact of disclosures. Contrary to perception, conventional funds that are signatories to UN’s Principles for Responsible Investment (PRI) or those with secondary sustainability mandates appear to be pretentious―behaving more like other conventional funds rather than sustainable funds. Indeed, fund managers are sensitive to disclosures only in the presence of binding commitments to environment sustainability. Sustainable funds lower their CR score by reducing exposure to fossil fuels, not by increasing exposure to renewables.