We'll Always Have Paris: How Institutional Exposures to Carbon Emissions Have Evolved Since 2015

Abstract

We develop a framework to measure decarbonization within portfolios and decompose these changes in carbon exposure into distinct components mapping to company behavior, investor behavior, and relative price effects.  We apply this framework to a large proprietary dataset of institutional investor portfolios to understand the evolution of institutional decarbonization in recent years.  We find there is a noticeable decarbonization trend globally since 2019 from both active holdings (excess positions relative to benchmark) and total holdings perspectives, measured through both carbon emissions and carbon intensity metrics.   Decomposing the changes based on our framework, we find the reduction in investor exposure to carbon on an overall basis (total exposure, using unadjusted portfolio weights) has been primarily driven by the relative repricing of high carbon assets as well as decarbonization by the underlying companies, while the reduction in  active carbon exposure (using weights in excess of benchmark allocations) has been driven by  portfolio repositioning.  In terms of regional difference, we find European assets have lead the US, EM and the rest of the world with steady reduction in carbon exposure since 2015, while reduced carbon exposure attributable to US assets has only manifested since 2019.  At the sector level, we observe price has a substantial impact on exposure as well. The diminishing exposure for Energy sector was mainly driven by  a significant downward repricing.  Conversely, the late 2021 recovery in Energy has partly reversed this.  While carbon exposures have declined substantially since 2019, aggregate emissions have not declined at the same pace over this period.

JEL Classification: D22, E70, G11, G23