This article examines the exposure to and management of carbon risks of different investor types. Considering the dual role as portfolio manager and partial owner, we analyze carbon risk for investors both in terms of exposure to portfolio values and in terms of responsibility as shareholder of carbon‐intensive firms. We show that among various investor types, the preference for holding carbon‐intensive stocks differs substantially, even when considering traditional investment decision parameters. In particular, it is governments whose portfolio values are most threatened by a carbon risk exposure of 49%, but at the same time, they prefer larger ownership shares in polluting firms. In contrast, individual investors, investment advisors, and mutual funds avoid holding stakes in these firms, while revealing only a moderate exposure of their assets to carbon risk. In view of the Paris Agreement, which includes the consistent steering of financial flows towards a low carbon transformation of the economy, our study provides policymakers with important implications regarding the coverage and effects of respective regulations. By identifying the ownership structures of carbon‐intensive firms and respective owners' portfolio compositions, we also offer implications for further research on portfolio decarbonization and shareholders' influence of corporate carbon management.

We analyze an emerging sustainable trend in asset management: the decarbonization of institutional portfolios. By using broad institutional ownership data, we show that investors exhibit herding behavior in the sense of decarbonization. They are inclined to follow their own or other investors' buys in green stocks and sales in brown stocks over adjacent quarters. Beyond that, we find that Hedge Funds as well as Investment Advisors lead the herd by executing trades in the sense of decarbonization. This is in line with expectations that sophisticated investors, who integrate environmental aspects into their investment decision process, are able to attract imitators. For the aspired achievement of market-wide decarbonization, investors leading the herd should be encouraged to further decarbonize their portfolios in order to trigger follow-up trades.

No abstract

We analyze an emerging sustainable trend in asset management: the decarbonization of institutional portfolios. By using broad institutional ownership data, we show that investors exhibit herding behavior in the sense of decarbonization. They are inclined to follow their own or other investors' buys in green stocks and sales in brown stocks over adjacent quarters. Beyond that, we find that Hedge Funds as well as Investment Advisors lead the herd by executing trades in the sense of decarbonization. This is in line with expectations that sophisticated investors, who integrate environmental aspects into their investment decision process, are able to attract imitators. For the aspired achievement of market-wide decarbonization, investors leading the herd should be encouraged to further decarbonize their portfolios in order to trigger follow-up trades.

No abstract