Does climate transition investments pay off? An empirical analysis of active Nordic funds and performance effects of exposure to carbon transition risk

Abstract

Sustainable finance and investment strategies have received increasing attention the previous years. In this thesis, we investigate the performance effects of carbon transition risk exposure in Nordic mutual funds. The analysis is restricted to 655 funds between the period from March 2017 to September 2022. We provide evidence that carbon transition risk does not independently impact the risk-adjusted performance in Nordic mutual funds. This result is inconsistent with existing literature on the topic where expanding carbon transition risk has a negative impact on performance. Furthermore, we conduct a portfolio analysis where we investigate the impact of active management on performance within high and low carbon risk environments. Including this perspective does not change the result, and we conclude that the carbon risk does not impact risk-adjusted performance in our sample. As we find that carbon risk is closely related to volatility and systematic risk, we hypothesize that carbon risk are increasingly accounted for by financial risk. This could explain why our findings deviate from the literature, as indirectly changing financial risk would not change the risk-adjusted performance. The decreasing performance of growth stocks due to rising interest rates could also eliminate the excess risk-adjusted return of low carbon risk funds.