Measuring the Carbon Exposure of Institutional Investors

We introduce a simple definition of carbon-intensive firms to measure institutional investors' exposure to the emission intensities of portfolio companies. The definition is based on major emission industry sectors identified by the Intergovernmental Panel on Climate Change (IPCC). All firms in these industries are classified as carbon-intensive. We show that 13F institutions, on average, gradually reduce their carbon exposure relative to the US value-weighted market portfolio, from overweighting stocks of high-emission firms by 0.5% in 2001 to underweighting by 0.2%–0.7% since 2015, consistent with the view that investors have become more concerned about the financial implications of climate change. Compared with firm-level emission data obtained from vendors, our measure is free from selection issues and can be extended to early periods and to international markets, as it only depends on industry classifications and covers all stocks. We do not find the same divestment trend before 2000, when climate risks were less eminent