Low carbon transition risk in mutual fund portfolios: Managerial involvement and performance effects

Transitioning to a low‐carbon economy to mitigate the effects of climate change involves risks. We investigate the effects of managerial ownership and management on the low carbon transition risk of mutual fund portfolios and the effects of low carbon transition risk on mutual fund performance and flows. Using low carbon transition risk ratings based on the unmanaged carbon risk of the companies included in fund portfolios, we find that managerial ownership and the socially responsible focus of the fund reduce fund portfolio exposure to carbon risk, whereas active management has the opposite effect. Furthermore, we find that funds with low carbon transition risk produce a better risk‐adjusted performance are more sensitive to tail risks and exhibit a better fund flow performance.