Using global institutional ownership data, we examine how Responsible Investors contribute to the decarbonization of the real economy. Despite holding a substantial share of global equities, Responsible Investors allocate less capital to high carbon-emitting companies and more to already green companies. Thereby they reduce their leverage for engagement over companies with significant potential for carbon emission reductions. While we observe a significant positive relation between companies ownership by Responsible Investors and the likelihood to commit to carbon emission reduction targets, their ownership does not relate to realized emission reductions. Instead, companies with greater Responsible Investor ownership exhibit significant improvements in ESG ratings, suggesting a focus on perceived sustainability rather than actual carbon emission reductions. Our findings indicate that Responsible Investors prioritize lower-emission portfolios over facilitating real-economy decarbonization, casting doubt on their role in aligning global financial flows with the Paris Agreement’s targets. This highlights the need for clearer regulatory guidance on the role of finance in achieving global climate objectives.
