The impact of greenhouse gas aversion on optimal portfolios

Anatoly B. Schmidt

Journal of Energy Markets

Abstract: In this paper, the notion of greenhouse gas aversion (GHGA) is introduced into the mean–variance portfolio framework. GHGA is assumed to be a weighted sum of the portfolio holdings’ greenhouse gas emission intensities. A new portfolio performance measure, the GHGA-tilted Sharpe ratio, is offered for greenhouse-gas-averse investors. While the classical Sharpe ratio may monotonically decrease with growing GHGA, the GHGA-tilted Sharpe ratio has a maximum at intermediate values of GHGA, defining an optimal GHGA-based mean–variance portfolio. The main holdings of such a portfolio represent promising investment leads for socially responsible investors who do not want to abandon the “brown†industries altogether. An example of a GHGA-based mean–variance portfolio formed with the major constituents of the energy sector is discussed.

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Persistent link: https://EconPapers.repec.org/RePEc:rsk:journ2:7959382

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