Power to the Owner: Institutional Investors’ Influence on Corporate Environmental Performance

Increasing climate change and the effects of global warming raise concerns insocieties. Literaturehas shown the role of institutional investors in socially responsible investments and investor activism to change firm behavior. This study examines the role of institutional investors in portfolio selection strategies and engagement activities towards corporate carbon emission reduction.Using a sample of U.S. and European firmsbetween 2009 and 2018, the results indicate that institutional investors use the proposed best-in-class screening method regarding corporate emissions, and alsoengagein corporate carbon emission improvementamong firms in their portfolios. Adifference-in-difference analysis onthe Paris Climate Convention generatescausal inference that the engagement of institutional investors strengthens when climate change awareness increases. Finally, testsonthe motivations of institutional investors confirm thepresence of financial motivations.