Decarbonizing Institutional Investor Portfolios

Decarbonizing Institutional Investor Portfolios

Authors:

Vaska Atta-Darkua

University of Virginia, Darden School of Business

Simon Glossner

Board of Governors of the Federal Reserve System

Philipp Krueger

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute; European Corporate Governance Institute (ECGI); University of Geneva - Geneva School of Economics and Management

Pedro Matos

University of Virginia - Darden School of Business; European Corporate Governance Institute (ECGI)

Abstract

Combining global data on institutional investors’ equity holdings and firm-level carbon emissions, we study how climate-conscious institutions reduced the carbon emissions of their equity portfolios between 2005 and 2019. We hypothesize that institutions could either decarbonize via tilting their holdings towards lower emitting firms or via engaging their portfolio firms to curb emissions. Our analysis suggests that tilting is the predominant strategy used by climate-conscious institutions but also uncover some early evidence of longer-term engagement with the top emitting firms following the 2015 Paris Agreement. We also find limited evidence of other portfolio measures of energy transition in terms of green patents and firm revenues. Overall, our analysis raises some doubts about the effectiveness of investor-led initiatives in reducing corporate carbon emissions and taking necessary action on climate change.