Abstract
AbstractThis 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.
Highlights
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
According to the Intergovernmental Panel on Climate Change (IPCC), Carbon Dioxide (CO2) accounts for about three quarters of global greenhouse gas (GHG) emissions and is likely to be the main driver for anthropogenic global warming (IPCC, 2014)
A previously more or less free or low-cost activity has, become costly, and companies are faced with potential additional costs due to carbon taxes or the requirement to provide allowances based on their carbon emissions (Cook, 2009)
Summary
According to the Intergovernmental Panel on Climate Change (IPCC), Carbon Dioxide (CO2) accounts for about three quarters of global greenhouse gas (GHG) emissions and is likely to be the main driver for anthropogenic global warming (IPCC, 2014). Estimates suggest that in order to achieve the 2C-goal set in Paris, about three quarters of all remaining coal, oil, and gas reserves should not be exploited (Le Quéré et al, 2015) Such a scenario will create so-called stranded assets, that is, assets losing their economic value well ahead of their anticipated useful lifetime. In addition to evaluating the carbon risk at the investor portfolio level, we provide important insights into the ownership structure of carbon-intensive firms. Our analysis shows that all investor types are pursuing a steady reduction in the carbon exposure of their portfolio values from 2012 onwards In parallel to their function as portfolio managers, investors play an important role in the ownership structure and as potential influencers of corporate management.
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