Are Investors Paying to be Green? Evidence from Mutual Funds

Abstract

We study how investors' preferences for green investments drive mutual fund allocation decisions and how mutual fund managers respond to these preferences. We document a green fund fee premium: the average self-labeled green fund charges about 5 basis points in additional fees annually. This premium is larger for funds that invest accordingly: the average low-emission fund is up to 10 basis points more expensive compared to its higher-emission counterpart. Our findings imply that mutual fund investors are willing to pay between 1 and 2 basis points in additional fees for each 1 million tonne reduction in CO2 emissions. We additionally exploit a setting where funds decide to adopt greener-sounding names. Funds that repurpose attract vastly larger flows in the period following the name change and raise fees by up to 12 basis points. However, investors do not blindly trust these name changes: they are only willing to allocate towards and pay more for a repurposed green fund if the name change is accompanied by a reduction in the fund’s portfolio carbon footprint.