With the adoption of the Paris Agreement in December 2015, better understanding of portfolio carbon dioxide (CO2) exposures has become increasingly important for investors, regulators and society at large. In this paper we measure the portfolio carbon footprints (CFPs) of pension funds stock investments. We utilize security-by-security holdings of Dutch pension funds over the period 2009-2015 and combine this with firm-level CO2 information to analyze the drivers of CFP at the portfolio level. The results show that pension funds face intricate trade-offs when aiming to reduce portfolio related CO2 emissions: expected dividend yields are positively related to the carbon footprint while portfolios systematic risk (market beta) is negatively related to the carbon footprint. The dividend trade-off with carbon exposures only applies to well-funded pension funds and is driven to some extent by investments in energy and utility companies. For the period 2013-2015 pension funds which publicly disclose their carbon footprint tend to have relatively lower exposure to firm with high carbon emissions.
Keywords: carbon emissions, pension funds, institutional investors, socially responsible investment, climate change.
JEL classifications: G11, G23, H55, Q54, Q56.
Working paper no. 554