Flows into green-flavoured investment funds are highly sensitive to climate change media coverage trends, according to a new academic study.
The paper released by the Bank of International Settlements (BIS) this month found “heightening climate news results in significantly larger capital inflows into green funds versus their non-green counterparts”.
In an analysis that also compared before-and-after fund holdings, the study shows green-labelled managers reduced exposure to “high-polluting firms” following climate news spikes.
“… green funds persistently reduce their investments in high emitters relative to low emitters in response to climate news. Our evidence is consistent with green funds gradually increasing over time their investments in low emitters by more than non-green funds,” the BIS paper says.
“… These results suggest that increasing public awareness boosts capital re-allocation towards green funds and this, in turn, potentially fosters investment relocation towards more environmentally-friendly companies”.
However, the positive feedback-loop identified in the study rests on a small sample size of 119 actively managed US-based global equities funds tracked from December 2006 through to June 2022.
“On a yearly basis, the number of green funds ranges from 39 (in 2007) to 94,” the report says.
The study – authored by a group including BIS analysts Giulio Cornelli and Leonardo Gambacorta along with external researchers Tommaso Oliviero and Koji Takahashi – sifted the green strategies out of an initial sample of 6,385 active funds based on key product names including “alternative energy, clean, climate, ecolog-, energy solution, environ-, green, low carbon, renewable, solar, sustainab-, or wind”.
After applying a filter based on those funds holding 10 per cent or more in fossil fuel production and services stocks, the green sample shrank by eight.
But the researchers also excluded “passively managed funds, such as index funds” – as well as active exchange-traded funds – at the start of the process, cutting out the fastest-growing subset of the investment universe of the last 15 years or more.
The sample study period also ends in 2022 at the peak of the environmental, social and governance (ESG) brief period of popularity in the US.
As recent data from Calastone and Morningstar shows, the global ESG investment trend has cooled dramatically over the last couple of years.
For instance, the Morningstar-owned specialist researcher, Sustainalytics, found ESG-style funds in the US suffered almost US$20 billion of net outflows last year even as money poured into traditional strategies.
“Our results indicate that the rise in news media coverage [of climate change] influences both the investment behavior of mutual fund investors and managers and suggest that, in such context, green funds may play an important role in promoting a sustainable economic transformation,” the BIS paper concludes.
If the finding is right, 2025 looms as another downbeat year for the US actively managed green fund sector amid a political regime looking to scrub climate change from the public debate.
Early in February, for example, acting chair of the Securities and Exchange Commission (SEC), Mark Uyeda, pulled the regulator out of a court case slated to contest an impending climate-related disclosure rule in the US.
Uyeda, appointed by President Trump to replace Gary Gensler, who resigned post the November 2024 election, has described the climate disclosure regulation as “deeply flawed”.