The impact of climate policies on risk-return characteristics in the fund industry: a multidimensional perspective

Abstract

Climate change poses a growing systemic risk to the global financial system. In response, governments are enacting stringent climate policies aimed at guiding economies toward low-carbon pathways. These regulatory shifts are reshaping the investment landscape by altering the risk-return dynamics of investment funds. This thesis investigates how climate policies influence the financial performance and volatility of ESG and conventional funds across different geographic regions.

Furthermore, this study contributes to the academic literature by focusing on transition risks, an understudied dimension of climate-related financial risks, through a multidimensional analytical approach. Using a robust sample of funds sourced from Morningstar and Refinitiv Eikon, the thesis compares ESG and conventional funds across Europe, North America, Asia, and globally. Monthly returns and volatility are examined over key regulatory milestones (e.g., COP21, EU Green Deal, COP26), with volatility modelled using GARCH, EGARCH, Ordinary Least Squares (OLS), and Multiple Linear Regressions (MLR) techniques. A unique Climate Policy Score is developed to quantify the regulatory intensity and ambition across regions and over time. This index is integrated into linear regression models to assess how climate policies, generally and during major policy events, affect fund risk and returns.

Finally, the study finds that ESG funds are more sensitive to regulatory shifts and may offer enhanced volatility resilience, particularly in regions with mature or ambitious climate policies. However, they do not consistently deliver superior returns. These insights clarify the financial implications of the climate transition for fund managers, institutional investors, and policymakers, highlighting the importance of regional policy context and market responsiveness.