Abstract: This paper presents new evidence on the response of institutional investors’ equity portfolios to changes in transition-related risks. Combining detailed data on global portfolios, firm-level emissions and climate policies, the empirical analysis reveals three main findings. First, investors reduce the carbon intensity of their equity portfolios following a tightening in climate policies. In large part, this response is driven by divestment from carbon-intensive firms. Second, I find that large multilateral agreements like the Paris Agreement, and pressure
from the investor base accelerate the reduction in portfolio carbon intensities. Third, the results suggest that a significant part of the bilateral emission reduction comes at the cost of carbon leakage to firms in countries with less stringent policies.