Practical Applications of Measuring the Carbon Exposure of Institutional Investors

Practical Applications In Measuring the Carbon Exposure of Institutional Investors, from the Summer 2020 issue of The Journal of Alternative Investments, authors Darwin Choi, Zhenyu Gao, and Wenxi Jiang (all of The Chinese University of Hong Kong) present a simple way to measure how heavily institutional portfolios tilt toward or away from stocks of high-carbon-emission firms. They consider two data sources: MSCI’s firm-based Carbon Emission Score and the UN Intergovernmental Panel on Climate Change’s (IPCC) industry classification system. They find that MSCI’s data are less useful because they focus on cleaner firms and create a skewed impression of falling emissions over time. In contrast, the IPCC tracks all US firms, classifies them as high- or low-carbon by industry, and has maintained a constant methodology over time. Choi, Gao, and Jiang combine the IPCC’s data with data from other sources to designate companies in certain industry sectors as high-carbon emitters. They then analyze institutional portfolios and use a formula to determine whether such portfolios tilt toward or away from stocks in those industries. They find that, on average, institutional portfolios were weighted toward high-carbon stocks until 2015—when their high-carbon holdings dropped sharply. Since then, institutional portfolios’ carbon weightings have remained lower than the market average.