Optimal investment portfolio and carbon emissions under climate risk ambiguity aversion

We derive the optimal investment portfolios of brown and green investors under the context of climate risk ambiguity aversion and calculate the equilibrium asset prices influenced by these portfolios, thereby uncovering the constraining mechanisms of capital allocation on firms’ carbon emission behaviours. The study shows that, under fixed quantities of risky assets, increasing levels of investors’ ambiguity aversion exhibit a nonlinear effect on firms’ greenhouse gas emissions, initially suppressing but later promoting them. Furthermore, as the proportion of green investors increases and their sensitivity to climate externalities strengthens, firms’ emissions significantly decrease. By utilising the annual Climate Physical Risk Index (CPRI) across multiple countries, the study comprehensively captures the impact of global climate risks on market assets. The findings indicate that green stocks are more susceptible to pronounced market shocks during tail risk events. Additionally, under policy constraints, firms facing higher environmental disclosure pressures receive further incentives to reduce carbon emissions.