The reward of green investment: Evidence from the co-holding network of mutual funds in China

This paper documents the emergence and evolution of a green co-holding network among Chinese mutual funds. The network has become increasingly interconnected over time, as reflected in the growing number of links and changes in its network structure. We find that greater similarity within the green co-holding network is associated with higher risk-adjusted excess returns. Further evidence is consistent with informational channels through which green network similarity is linked to fund performance, including belief co-movement, strategic information sharing, more stable investment behavior, and collective governance. We also show that the financial reward associated with green network similarity may partly reflect real-economy improvements, as portfolio firms exhibit greater green innovation and lower carbon emissions. In addition, green and non-green networks display different return dynamics. Whereas non-green investment networks exhibit a reversal pattern between short-term and long-term mutual fund performance, green network similarity is positively associated with fund performance over both horizons. This difference is consistent with the distinct roles of climate physical risk and investor sentiment in shaping the long-run rewards of green versus non-green investment networks. Overall, our findings shed light on the incentives underlying green investment networks, provide practical implications for mutual fund managers engaged in green investing, and offer theoretical and empirical support for the development of sustainable finance in emerging markets.