This study investigates the hidden strategies mutual funds use to conduct carbon divestment. Drawing on a large, representative panel dataset of 10,100 observations of U.S.-focused mutual funds with private equity investments, we employ a Difference-in-Differences (DiD) design to establish causal inference and address endogeneity concerns. We find that mutual funds reallocate investments toward firms without carbon disclosure in two primary ways: (1) shifting from brown (high-carbon) public firms to brown private firms, and (2) shifting toward brown public firms that lack available carbon risk scores. Our analysis further identifies two key mechanisms driving this behavior: (1) the incentive to attract capital from ESG-conscious investors, who tend to penalize visible brown public holdings while remaining largely unaware of disclosure gaps and brown private investments; and (2) information asymmetry in green labeling and weaker private-market disclosure requirements enable mutual funds to maintain diversification and pursue higher returns from carbon-intensive assets in private market without investors’ awareness.
