Does Foreign Institutional Capital Promote Green Growth for Emerging Market Firms?

We examine whether foreign institutional capital promotes green growth in emerging-market (EM) firms, using firm-level and China A-shares’ market-level inclusions in the MSCI Index as shocks to foreign capital. While foreign capital boosts output, emissions rise disproportionately in EM firms, leading to substantial increases in emissions intensity. In contrast, the emissions intensity of developed-market firms tends to decrease with foreign capital, enabling investors to offset deterioration in portfolio carbon metrics while benefiting from higher returns on EM investments. The increases in emissions are concentrated in countries with weaker environmental regulations and firms held by investors driven more by financial incentives. Our results suggest that foreign investors prioritize financial performance over portfolio carbon metrics when investing in EM firms.