The road to net zero: a fund flow investigation

BIS Working Papers  |  No 1220  | 
18 October 2024

Summary

Focus

Using US-domiciled energy equity mutual funds and exchange traded funds from 2006 to 2022, we focus our analysis on the shifting patterns and pace of flows of green and brown funds in response to climate-related news shocks.

Contribution

We contribute to the literature in two ways. First, we contribute to the theoretical literature by providing evidence of the transition from brown to green investments in the context of climate change. We specifically focus on trading activity, which serves as a direct indicator of where the capital is being directed. Second, we contribute to the empirical literature by examining the role of green investments in the real economy and the relationship between the speed of flows and economic activity and stock returns.

Findings

We find that the growing public attention on climate change encourages investment in green funds and discourages investment in brown funds, casting adverse effects on US stock market performance and growth of industrial production. The transition from brown to green energy investments is time-dependent and coincides with changes in US climate policy from 2015 to 2022. We also find that an increase in green fund investment may deter brown fund investment and mitigate the adverse impacts of climate news shocks on stock market performance and industrial production growth. Quick flows into green funds are associated with better stock market performance and industrial production growth, whereas the opposite is true for flows into brown funds.


Abstract

We analyze how U.S. green and brown energy equity mutual funds and ETFs respond to public attention on climate change from 2006 to 2022. Our findings indicate that green fund inflows consistently increased, peaking in 2020 in reaction to climate news, while brown fund inflows steadily declined. This shift toward green investments may discourage brown investments and help mitigate the negative impacts of climate news on stock market and industry production growth. The pace of transition from brown to green funds aligns with changes in U.S. climate policy, with a faster transition associated with positive stock market performance and industry production growth.

JEL Classification: G11, G23, Q43, Q54

Keywords: green and brown fund flows, climate change news, evolving transition, pace of transition