Institutional investors and corporate carbon emissions
Abstract
There is debate about whether institutional investors reduce corporate carbon emissions. This paper reviews the theoretical and empirical arguments about the emissions-reducing and greenwashing roles of institutional investors, such as mutual funds, private equity, and pension funds. On the other hand, other studies have found the impact of institutional investors to be limited or symbolic. It has been suggested that institutional investors are more inclined to rebalance their portfolios or divest their shares rather than directly influence firms' emissions. In some cases, the reported reductions in emissions by firms may result from asset transfers, outsourcing, and disclosure strategies rather than from actual emissions reductions. In addition, the green image of firms, which is a major concern among institutional investors, could lead them to focus more on disclosure and branding rather than actual efforts in reducing emissions. Therefore, the impact of institutional investors is highly heterogeneous. Emissions reduction is more likely to be achieved by institutional investors when they have a high level of ownership, a long investment horizon, governance expertise, and a conducive regulatory framework. In contrast, passive investors, who have limited divestment power and are subject to strong benchmarking pressure, are more likely to rely on rhetoric rather than actual pressure to achieve their goals. Overall, the discussion above indicates that institutional investors can reduce firms' carbon emissions under specific institutional and regulatory conditions. However, the impact of institutional investors is conditional rather than absolute. Understanding the heterogeneity of institutional investors and the channels of corporate governance is critical in assessing the overall capacity of financial markets to mitigate the effects of climate change.