Do Investors Hedge Climate Risk? Evidence from 19 Million Retail Stock Traders

Climate change is a “crisis multiplier” that has profound effects on various aspects of household decisions. We study the impact of climate change concern on household’s climate-risk-based investment decisions using administrative account-level data of all retail investors from the world’s 9th largest stock exchange. Our contribution includes a clean identification of the “local” climate shocks and accurate measurement of investment response by retail investors. Combining the universe of investor-level daily trading data from National Stock Exchange of India with granular data on local temperatures across India, we show that: (i) experiencing abnormally higher local temperature leads to a large and significant increase of 7% in net investment flow to green stocks, while the impact on brown stock trading is marginal and insignificant; (ii) the impact is considerably stronger in coastal areas that are more exposed to climate risk, regions with higher level of economic development and when media attention is heightened; (iii) these effects are not fully accounted for by changes in household wealth and preference for other stock attributes. Our results shed light on the effect of revision in one’s belief in retail investor’s portfolio rebalancing in the context of climate change