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The Journal of Alternative Investments

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Measuring the Carbon Exposure of Institutional Investors

Darwin Choi, Zhenyu Gao and Wenxi Jiang
The Journal of Alternative Investments Summer 2020, jai.2020.1.095; DOI: https://doi.org/10.3905/jai.2020.1.095
Darwin Choi
is an associate professor in the Department of Finance, CUHK Business School, The Chinese University of Hong Kong in Hong Kong
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Zhenyu Gao
is an assistant professor in the Department of Finance, CUHK Business School, The Chinese University of Hong Kong in Hong Kong
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Wenxi Jiang
is an assistant professor in the Department of Finance, CUHK Business School, The Chinese University of Hong Kong in Hong Kong
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Abstract

The authors 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. The authors 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, the authors’ 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. The authors do not find the same divestment trend before 2000, when climate risks were less eminent.

TOPIC: ESG investing

Key Findings

  • • We introduce a simple definition of carbon-intensive firms to measure institutional investors’ exposure to the emission intensities of portfolio companies.

  • • 13F institutions have become more concerned about the financial implications of climate change. Relative to the US value-weighted market portfolio, they have gone from overweighting high-emission stocks by 0.5% in 2001 to underweighting by 0.2%–0.7%since 2015.

  • • 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.

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The Journal of Alternative Investments: 24 (4)
The Journal of Alternative Investments
Vol. 24, Issue 4
Spring 2022
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Measuring the Carbon Exposure of Institutional Investors
Darwin Choi, Zhenyu Gao, Wenxi Jiang
The Journal of Alternative Investments Apr 2020, jai.2020.1.095; DOI: 10.3905/jai.2020.1.095

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Measuring the Carbon Exposure of Institutional Investors
Darwin Choi, Zhenyu Gao, Wenxi Jiang
The Journal of Alternative Investments Apr 2020, jai.2020.1.095; DOI: 10.3905/jai.2020.1.095
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    • MEASURES OF CARBON EXPOSURE
    • RESULTS
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