Low‐Carbon Transition and Active Management: Evidence From Emerging Market Funds

ABSTRACT Previous literature finds mixed evidence on the performance of emerging mutual funds and how investors are becoming more aware of investing in companies involved in low‐carbon emission activities. Given the opportunities that emerging markets and sustainable investing offer to active management, this study aims to fill a gap in the literature by considering their effect on the performance of emerging mutual funds. The study considers a large worldwide sample of equity mutual funds that invest in emerging countries from January 2000 to January 2024. We follow a robust multi‐method empirical approach. First, we analyze portfolios formed according to carbon risk score and the level of active management. We also perform cross‐sectional and panel data regressions. Results show that low‐carbon funds and more active funds achieve greater abnormal returns. Specifically, funds with lower carbon risks perform better among less active funds, while more active funds outperform among high‐carbon risk funds. These results are robust when controlling for other performance determinants and accounting for the variability of fund performance and other characteristics over time and across countries. The evidence emphasizes the role of strategic and tactical asset allocations on fund performance and entails that active managers, who take a holistic approach by integrating sustainable criteria in financial decisions, navigate towards the best investment opportunities while transitioning towards a low‐carbon world.