Carbon home bias of European investors

We investigate the extent to which investors exhibit carbon home bias: disproportionate investment in carbon-intensive firms from the home market. We utilize a comprehensive stock-level holdings dataset of European investors to understand the relationship between carbon home bias, divestment and disclosure. We show that investors exhibit significant carbon home bias, with about half of their carbon emissions stemming from their domestic portfolios. Over our sample period 2013-2022, European investors have decarbonized their portfolios, but predominantly through their foreign portfolios. Domestic carbon exposures have persisted. Differences-in-differences analyses show that a shock inducing institutional investors to decarbonize is associated with higher ownership of domestic carbon-intensive stocks. Consistent with engagement, higher domestic ownership of carbon-intensive stocks is associated with lower carbon emissions and a higher likelihood of carbon disclosure. Our results show that carbon home bias is not driven by differential home-foreign carbon risk premia, but instead suggest investors’ successful engagement at home while divesting abroad.

Keywords: home bias; carbon footprint; divestment; engagement; securities holdings statistics
JEL codes G11; G15; G23; H55; Q54; Q56

Working paper no. 786