Nature Risk Management in Domestic and Foreign Institutional Investments
Abstract
We compare nature risk management in domestic and foreign institutional investments using a comprehensive global sample of firms covered by the S&P nature risk and FactSet ownership datasets. Physical risk and biodiversity risk negatively predict domestic and foreign institutional ownership at the firm level. At the institution-firm level, institutions avoid firms with high physical risk exposure more in domestic investments compared to foreign ones, possibly because of a higher perception or easier assessment of domestic physical risks. Conversely, institutions tilt toward high-biodiversity-dependency firms in their domestic portfolios while avoiding similar firms in their foreign ones, indicating a preference for engagement at home and divestment abroad. These differences in nature risk management between domestic and foreign investments cannot be explained by differences in risk-adjusted returns.
