Something in the air: Does air pollution affect fund managers’ carbon divestment?

• Main Authors: HUYNH, Thanh, LI, Frank Weikai, XIA, Ying Xia
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2021
• Subjects: Air Quality Index; Mutual Funds; Carbon Divestment; Belief Revision; Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/6815; https://ink.library.smu.edu.sg/context/lkcsb_research/article/7814/viewcontent/SSRN_id3908963.pdf
• Institution: Singapore Management University

We examine whether fund managers overestimate carbon risk when they are exposed to local air pollution. We find that air pollution causes managers to underweight stocks of high-emission firms. The effects are stronger for less salient scopes of carbon emissions, among managers located in pro-environmental states, and among those likely to be surprised by air pollution—consistent with the idea that managers revise their beliefs about climate-transition risk following their exposure to air pollution. Carbon-intensive stocks sold by managers who are exposed to air pollution subsequently outperform stocks that they buy, suggesting that such underweighting is costly to fund investors.