Carbon Home Bias of European Investors

We study how investor’s persistent preference to invest more in the home market — “home bias” — is affecting investor’s efforts to mitigate risks associated with climate change. When investors have a tendency to tilt their portfolio towards domestic assets, the carbon intensity in the home market may well affect the carbon exposures of their portfolios and hence climate risk. This paper analyzes the carbon exposure and home bias of stock portfolios across a wide range of different investors from the euro area using a unique stock-level holdings data. We find that at the stock-level, carbon-intensive firms have higher ownership when the stocks are from the EU-home market. At the portfolio level, higher carbon footprints of euro area investors are related to home bias. The bias to invest more in carbon-intensive firms from the domestic and EU-home market is associated with higher stocks returns.