Mutual Fund Investments in Response to Local Declining Regulatory Climate Risk

Abstract

Donald Trump’s election in 2016 and the Republican Party’s resistance to climate regulatory reforms may have lowered investors’ expectations regarding national climate change policy progress. This study leverages this local political shift in climate policy to examine the response of U.S. mutual funds following the election of the Trump Administration. My findings indicate that institutional investors continued to reduce their holdings in high-pollution firms, despite the prospect of less stringent climate regulations under the Trump-led government. This evidence strongly supports the market perception of climate change regulation as a long-term, global regulatory focus. The primary findings are robust across both ESG-oriented and non-ESG-oriented mutual funds. The continued divestment by mutual funds is more pronounced among those with high past fund flows and higher management fees. Finally, the mutual funds’ divestment from high-emission companies has real effects, with evidence of more intensive carbon emissions reduction among firms underweighted by mutual funds.