Institutional investors and low-carbon transitions: A multi-level analysis of lead firm reorientation in northern Europe

Since low-carbon transitions require significant reorientations of financial flows, there is increasing interest in institutional investors (such as pension funds and insurance companies), which are seen as potential providers of long-term ‘patient capital’. While previous research has addressed topics like divestment from fossil fuels, investment in renewable energy, and barriers to change, there are calls in the literature for more integrated analyses. Responding to these calls, this paper analyses the multiple low-carbon reorientation strategies of seven leading institutional investors in Norway, Sweden, and the UK from 2012 to 2021. Using the Multi-Level Perspective to frame the research and understanding finance as a separate regime, we conceptualize low-carbon reorientation as involving a shift in institutional investments from fossil fuel regimes towards green niche-innovations. Drawing on fund analysis, interviews, and document analysis, the analysis consequently focuses on three strategies with the following findings: 1) funds are divesting from coal but holding on to oil companies, 2) investments in renewable energy firms increased significantly in recent years, 3) several funds also increased their direct investments in renewable energy projects, which is a novel finding. We conclude that leading institutional investors are reorienting in low-carbon directions, but that several financial regime rules (like prescribed capital allocation requirements and stock market indices) lead to continued oil lock-ins. Extending previous analyses of institutional investors with more recent data of lead firms, the paper thus finds more engagement with some dimensions of low-carbon transitions but also ongoing path dependence in others.