Climate risk, sustainable finance and international business: a research agenda

Abstract

In 2015, 196 Parties adopted the Paris Agreement to limit global warming to well below 2 degrees C compared to pre-industrial levels, and to achieve a low-carbon world by 2050. Revisions to international finance investment strategies are expected to be the mainstay of this ambitious objective. So far, the international business literature has paid little attention to either international investors’ responses to climate change or to the potential for those investors to foster the low-carbon transition. We build on advances in research on climate finance and develop an investor climate change strategy typology which considers three dimensions – investors’ climate pledges, environmental, and social and (corporate) governance (ESG) investing and fossil fuel divesting strategies. We link different transition scenarios to these different investor strategies. We exploit data on equity portfolios of the ten biggest U.S. institutional investors valued at over USD15 trillion in January 2021 and show that despite variations across investors, since 2015 investors have increased their visibility through their climate pledges and ESG performance. However, they have mostly failed to divest from fossil fuels. We draw on this evidence to propose a novel international climate finance research agenda.

Keywords: Climate finance, international business, institutional investors, climate pledges, ESG investing, fossil fuel divesting.

JEL Classification: G23, G30, M14, M20, Q54