Risk measures and portfolio analysis in the paradigm of climate finance: a review

Siddhartha P. Chakrabarty () and Suryadeepto Nag
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Siddhartha P. Chakrabarty: Indian Institute of Technology Guwahati

SN Business & Economics, 2023, vol. 3, issue 3, 1-22

Abstract: Abstract Climate change brings with it new risks for the finance sector, which in turn provides new opportunities to mitigate this risk, emanating from climate change. To invest sustainably and move away from firms that have disproportionately high carbon footprints, investors need suitable risk measures and appropriate portfolio management approaches. In this paper, we conduct a review of the mathematical models used to measure carbon risk. Subsequently, we review portfolio optimization models based on modern portfolio theory and the incorporation of risk measures into portfolio optimization strategies. We find that there is a lack of consensus about the existence of a carbon premium or an equity greenium in stock prices. We also find that the literature on portfolio optimization techniques is comparatively nascent.

Keywords: Carbon premium; Carbon risk; Climate finance; Climate risk; Portfolio optimization (search for similar items in EconPapers)
JEL-codes: G11 G32 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s43546-023-00449-w

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