Do Foreign Institutional Investors Promote Green Growth of Emerging Market Firms?

Can foreign investor capital promote economic growth in the emerging market and address climate change at the same time? Our results suggest that the answer is no. We consider emerging market firms’ inclusion in the MSCI index as a quasi-natural case of foreign-investor-driven firm expansion opportunity. A mechanical increase in foreign mutual funds following the index inclusion leads to significant increases in sales and profit margin, but at the expense of increased both direct and indirect carbon emission levels in the short term, with a further deterioration in the per-revenue emission intensity over the longer term. We document evidence consistent with greenwashing and outsourcing of pollution standards, with the capital inflow from more stringent environmental policy environment leading to greater emission among firms in less stringent countries. Our evidence suggest that environmental considerations may be given a lower priority when the emerging market firm utilizes foreign capital for growth.