The Power of Institutional Investors

Over 500 institutional investors with US$39 trillion in assets under management signed a statement in September 2022, advocating for governments to implement ambitious policies to combat the climate crisis effectively. A report also estimated that around 74 percent of institutional investors tend to divest from companies with poor ESG track records.

“Our findings support the notion that institutional investors are generally becoming more aware of climate risks and actively avoid industries with high carbon footprints.”

Prof. Gao Zhenyu

As large market participants, the actions of institutional investors such as banks, mutual funds, pensions and insurance companies strongly influence the overall market. But how do they react to climate change? Our research Measuring the Carbon Exposure of Institutional Investors sought to analyse institutional investor exposure to stocks of carbon-intensive U.S. firms, and to systematically examine whether they reduced their vulnerability to climate change as the world became increasingly concerned about its effects.

After using the IPCC-based classification to identify all U.S. stocks, we then analysed how institutional investors reacted to climate risks.

We found that, over the last two decades or so, large-scale investors have generally reduced their holdings in high-emission companies, from overweighting the stocks of high-emission firms, relative to the market, by 0.5 percent in 2001 to underweighting them by 0.2 percent to 0.7 percent since 2015. This decline has coincided with the mainstreaming of calls for institutional investors to divest fossil fuel-related holdings and to invest in renewable energy, around the same time. Our findings support the notion that institutional investors are generally becoming more aware of climate risks and actively avoid industries with high carbon footprints, similar to the case of so-called “sin” stocks such as tobacco, alcohol and gambling on ethical considerations.

We also extended our analysis to before the year 2000, but we did not see a corresponding decline in institutional ownership of high-emission stocks, presumably because climate change was less of a concern at that time. The results complement our previous research on the impact of global warming on retail investors, suggesting that both individual and institutional investors are increasingly taking heed of climate risks in their decision making.