Institutional Investors and the Fight Against Climate Change

Abstract

Research Question/Issue: This article examines the role of institutional investors in the fight against climate change. We explain the institutional context, provide evidence highlighting institutional investors' bright and dark sides in this fight, and develop multiple ideas for future research. Research Findings/Insights: We show that climate change has a significant impact on institutional investors. Simultaneously, we demonstrate that institutional investors can have a significant positive impact on fighting climate change, particularly if they actively engage with portfolio firms to reduce carbon emissions. For risk management reasons, this is in their own interest, and it is also in the interests of society. Theoretical/Academic Implications: We highlight possible future research avenues on the link between institutional investors and climate change, emphasizing issues related to environmental, social, and governance (ESG) rating agencies, greenwashing, and the risk of a loss of trust in ESG products. Climate change constitutes one of the grand challenges of our time, and substantially more research on the role of finance is required. Practitioner/Policy Implications: Climate change imposes financial risks on institutional investors' portfolio firms, which must be actively addressed in the investment process. Nascent evidence indicates that markets have begun pricing these risks. Institutional investors can positively influence climate change by engaging portfolio firms on their emissions and simultaneously reducing climate transition risks.