The impact of climate risk attention on excess returns of actively managed funds
DOI: https://doi.org/10.3846/jbem.2026.28069Abstract
This study constructs a climate risk attention indicator for Chinese funds by applying Word2Vec-based text analysis to annual fund reports. This study examines how climate risk attention affects excess returns in actively managed funds, using the Brinson model for performance decomposition. The results show that climate risk attention increases fund excess returns with notable heterogeneity: a 1% increase in acute physical risk attention raises excess returns by 24.675%, whereas the same increase in transition risk attention leads to a much smaller effect—only 2.746%, approximately 11% of the acute risk impact. Chronic physical risks, such as rising temperatures, do not significantly affect returns. These findings underscore the importance for fund managers to prioritize acute and transition risks, particularly acute physical risks, in climate-related investment strategies. This study extends the empirical experience in Chinese climate finance, validates a machine-learning-constructed climate risk dictionary, and provides practical insights for fund managers and regulators. A limitation is the reliance on annual reports, which may not capture real frequency shifts in risk attention.
Keywords:
climate risk attention, risk management in investments, fund performance, Chinese financial market, actively managed funds, excess returnsHow to Cite
Share
License
Copyright (c) 2026 The Author(s). Published by Vilnius Gediminas Technical University.
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
Auer, B. R. (2016). Do socially responsible investment policies add or destroy European stock portfolio value? Journal of Business Ethics, 135(2), 381–397. https://doi.org/10.1007/s10551-014-2454-7
Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. Quarterly Journal of Economics, 131(4), 1593–1636. https://doi.org/10.1093/qje/qjw024
Barnett, M., Brock, W., & Hansen, L. P. (2020). Pricing uncertainty induced by climate change. The Review of Financial Studies, 33(3), 1024–1066. https://doi.org/10.1093/rfs/hhz144
Brinson, G. P., Hood, L. R., & Beebower, G. L. (1986). Determinants of portfolio performance. Financial Analysts Journal, 42(4), 39–44. https://doi.org/10.2469/faj.v42.n4.39
Brinson, G. P., Singer, B. D., & Beebower, G. L. (1991). Determinants of portfolio performance II: An update. Financial Analysts Journal, 47(3), 40–48. https://doi.org/10.2469/faj.v47.n3.40
Cai, J., Zheng, P., Xie, Y., Du, Z., & Li, X. (2025). Research on the impact of climate change on green and low-carbon development in agriculture. Ecological Indicators, 170, Article 113090. https://doi.org/10.1016/j.ecolind.2025.113090
Chang, E. C., & Lewellen, W. G. (1984). Market timing and mutual fund investment performance. The Journal of Business, 57(1), 57–72. https://doi.org/10.1086/296224
Chen, J., Hong, H., Huang, M., & Kubik, J. D. (2004). Does fund size erode mutual fund performance? The role of liquidity and organization. American Economic Review, 94(5), 1276–1302. https://doi.org/10.1257/0002828043052277
Chen, Y., & Wei, H. (2025). Fund style drift and fund performance: Evidence from China. PLoS ONE, 20(2), Article e0316932. https://doi.org/10.1371/journal.pone.0316932
Chevalier, J., & Ellison, G. (1999). Are some mutual fund managers better than others? Cross-sectional patterns in behavior and performance. The Journal of Finance, 54(3), 875–899. https://doi.org/10.1111/0022-1082.00130
Coval, J., Jurek, J., & Stafford, E. (2009). The economics of structured finance. The Journal of Economic Perspectives, 23(1), 3–26. https://doi.org/10.1257/jep.23.1.3
Danese, G., & De Marchi, V. (2024). Business adaptation strategies to climate change: A systematic review. Journal of Cleaner Production, 485, Article 144322. https://doi.org/10.1016/j.jclepro.2024.144322
Engle, R. F., Giglio, S., Kelly, B., Lee, H., & Stroebel, J. (2020). Hedging climate change news. The Review of Financial Studies, 33(3), 1184–1216. https://doi.org/10.1093/rfs/hhz072
Ferris, S. P., & Yan, X. S. (2007). Do independent directors and chairmen matter? The role of boards of directors in mutual fund governance. Journal of Corporate Finance, 13(2), 392–420. https://doi.org/10.1016/j.jcorpfin.2006.12.004
Giglio, S., Kelly, B., & Stroebel, J. (2021). Climate finance. Annual Review of Financial Economics, 13, 15–36. https://doi.org/10.1146/annurev-financial-102620-103311
Guo, W., Huang, Z., & He, J. (2024). Confucian culture and corporate climate change risk disclosure: Based on text analysis and machine learning. China Journal of Economics, 11(2), 170–204. https://doi.org/10.26599/CJE.2024.9300206
Hampton, S., Byfuglien, A., Eadson, W., Latter, B., Hardy-Jones, B., Sugar, K., Bamford, H., & Blundel, R. (2025). Multiple roles of business for climate action. Iscience, 28(12), Article 114059. https://doi.org/10.1016/j.isci.2025.114059
Han, H., Wang, Z., & Zhao, X. (2024). Does cross-border investment improve mutual fund performance? Evidence from China. China Economic Review, 86, Article 102186. https://doi.org/10.1016/j.chieco.2024.102186
Hassan, T. A., Hollander, S., van Lent, L., & Tahoun, A. (2019). Firm-level political risk: Measurement and effects. The Quarterly Journal of Economics, 134(4), 2135–2202. https://doi.org/10.1093/qje/qjz021
He, Y., Li, L., Li, Y., Liang, Y., & Ye, Y. (2025). Lexical diversity, soft information skills and hedge fund performance: Evidence from China. Pacific-Basin Finance Journal, 90, Article 102635. https://doi.org/10.1016/j.pacfin.2024.102635
Henriksson, R. D., & Merton, R. C. (1981). On market timing and investment performance. II. Statistical procedures for evaluating forecasting skills. The Journal of Business, 54(4), 513–533. https://doi.org/10.1086/296144
Humphrey, J. E., Warren, G. J., & Boon, J. (2016). What is different about socially responsible funds? A holdings-based analysis. Journal of Business Ethics, 138(2), 263–277. https://doi.org/10.1007/s10551-015-2583-7
Ibbotson, R. G., & Kaplan, P. D. (2000). Does asset allocation policy explain 40, 90, or 100 percent of performance? Financial Analysts Journal, 56(1), 26–33. https://doi.org/10.2469/faj.v56.n1.2327
Jensen, M. C. (1968). The performance of mutual funds in the period 1945–1964. The Journal of Finance, 23(2), 389–416. https://doi.org/10.1111/j.1540-6261.1968.tb00815.x
Jiang, P., Tian, S., & Cheung, Y.-L. (2011). Research on the ownership structure of fund management companies and fund performance. Financial Research, (6), 123–35 (in Chinese).
Kreander, N., Gray, R. H., Power, D. M., & Sinclair, C. D. (2005). Evaluating the performance of ethical and non-ethical funds: A matched pair analysis. Journal of Business Finance & Accounting, 32(7–8), 1465–1493. https://doi.org/10.1111/j.0306-686X.2005.00636.x
Li, H., Wang, X., Zhao, X., & Qi, Y. (2021). Understanding systemic risk induced by climate change. Advances in Climate Change Research, 12(3), 384–394. https://doi.org/10.1016/j.accre.2021.05.006
Li, Q., Shan, H., Tang, Y., & Yao, V. (2024a). Corporate climate risk: Measurements and responses. The Review of Financial Studies, 37(6), 1778–1830. https://doi.org/10.1093/rfs/hhad094
Li, X., Zhao, R., & Wang, J. (2024b). Does ESG investment improve fund performance?—Also discussing the impact of ESG investment on the performance-flow relationship. Nankai Economic Research, (6), 185–203 (in Chinese).
Liang, J., Zhang, Y., & Li, Y. (2024). The role of ESG scores in ESG fund performance and institutional investor selection. Finance Research Letters, 65, Article 105553. https://doi.org/10.1016/j.frl.2024.105553
Lin, J., Pan, D., & Sha, Y. (2025). The impact of ESG investment on fund performance: Evidence from mutual fund style drift. Pacific-Basin Finance Journal, 91, Article 102707. https://doi.org/10.1016/j.pacfin.2025.102707
Liu, J., & Yi, W. (2024). Does the style drift caused by frequent cross-industry portfolio rebalancing harm fund performance? Evidence from China. Finance Research Letters, 60, Article 104838. https://doi.org/10.1016/j.frl.2023.104838
Mao, X., Hu, C., Xiong, L., & Wang, Y. (2025). Climate risk attention and financial markets: The time–frequency and quantile perspective. Finance Research Letters, 85, Article 108130. https://doi.org/10.1016/j.frl.2025.108130
Markowitz, H. (1952). Portfolio selection. The Journal of Finance, 7(1), 77–91. https://doi.org/10.2307/2975974
Mikolov, T., Chen, K., Corrado, G., & Dean, J. (2013). Efficient estimation of word representations in vector space. arXiv. https://doi.org/10.48550/arXiv.1301.3781
Nordhaus, W. D. (1977). Economic growth and climate: The carbon dioxide problem. The American Economic Review, 67(1), 341–346.
Petajisto, A. (2013). Active share and mutual fund performance. Financial Analysts Journal, 69(4), 73–93. https://doi.org/10.2469/faj.v69.n4.7
Qiao, C., & Chen, S. (2026). How do extreme climate can drive commercial banks’ credit disbursement? International Review of Financial Analysis, 110, Article 104875. https://doi.org/10.1016/j.irfa.2025.104875
Sautner, Z., van Lent, L., Vilkov, G., & Zhang, R. (2023). Firm-level climate change exposure. The Journal of Finance, 78(3), 1449–1498. https://doi.org/10.1111/jofi.13219
Sharpe, W. F. (1966). Mutual fund performance. The Journal of Business, 39(1), 119–138. https://doi.org/10.1086/294846
Syed, A. M. (2017). Socially responsible: Are they profitable? Research in International Business and Finance, 42, 1504–1515. https://doi.org/10.1016/j.ribaf.2017.07.090
Tao, M., Che, S., & Klein, T. (2026). Climate risk exposure and banking competition: Evidence from China’s listed banks. Finance Research Letters, 88, Article 109344. https://doi.org/10.1016/j.frl.2025.109344
Tiwari, S., Shahzad, U., Alofaysan, H., Walsh, S. T., & Kumari, P. (2024). How do renewable energy, energy innovation and climate change shape the energy transition in USA? Unraveling the role of green finance development. Energy Economics, 140, Article 107947. https://doi.org/10.1016/j.eneco.2024.107947
Treynor, J., & Mazuy, K. (1966). Can mutual funds outguess the market? Harvard Business Review, 44(4), 131–136.
Trinks, P. J., & Scholtens, B. (2017). The opportunity cost of negative screening in socially responsible investing. Journal of Business Ethics, 140(2), 193–208. https://doi.org/10.1007/s10551-015-2684-3
Yu, B., Shen, Y., Jin, X., & Xu, Q. (2022). Does prospect theory explain mutual fund performance? Evidence from China. Pacific-Basin Finance Journal, 73, Article 101766. https://doi.org/10.1016/j.pacfin.2022.101766
Zhang, Y., Wang, C., & Chen, Y. (2024). Foreign ownership, institutional distance and mutual fund performance: Evidence from China. Pacific-Basin Finance Journal, 87, Article 102474. https://doi.org/10.1016/j.pacfin.2024.102474
Zhao, S., Yan, H. and Zhang, K. (2016). Is the Fama-French five-factor model better than the three-factor model?—Empirical evidence from the Chinese a-share market. Nankai Economic Research, (2), 41–59.
CrossMark check
Published
Issue
Section
Copyright
Copyright (c) 2026 The Author(s). Published by Vilnius Gediminas Technical University.
License
This work is licensed under a Creative Commons Attribution 4.0 International License.