Net-zero portfolios (NZP), which aim to reduce carbon footprint exposure to zero by a target date, are becoming a popular vehicle to align investors’ incentives with climate scenarios and to exert pressure on carbon emitters. We characterize the decision and timing to divest individual companies from NZP using a novel forward-looking measure, distance-to-exit (DTE), which calculates the distance, in years, until a company gets excluded from NZP. Companies with greater DTE have higher valuation ratios and lower expected returns, consistent with the hypothesis that DTE captures uncertain institutional pressure to decarbonize and thus can be a useful tool to quantify carbon-transition risk.

We model stakeholder-driven institutional divestiture that promotes stranding of harmful assets through both a political channel and financial prices. We introduce two novel mechanisms. First, institutional divestiture weakens stakeholders' asset exposures, improving political conditions for stranding. Second, institutional divestiture credibly communicates information about citizen preferences, environmental harm, and economic benefits to financial markets and political participants. These channels drive harmful-asset divestiture, which reduces the asset price and raises its strand probability. Support for divestiture increases under supermajority strand requirements, and when institutions internalize rest-of-world welfare. We detail the equilibrium interactions between information, divestiture, prices, and stranding in a dynamic, rational-expectations game.

Do institutional investors favor domestic over foreign stocks of companies with high carbon emissions? We undertake a global analysis of institutional investor portfolios and find widespread underweighting of companies with higher carbon emissions. This underweighting is largely driven by underinvestment in foreign companies with high carbon emissions, both at the intensive (tilting) and extensive (exclusion) margins. Domestic firms with similar characteristics (except for their location) are overweighted but by a smaller magnitude. Also, the divestment of foreign polluters has increased since 2015. These results reveal the presence of a carbon home bias for domestic companies with high carbon emissions.