Hedging Climate Risk

Mats Andersson, Patrick Bolton and Frédéric Samama

Financial Analysts Journal, 2016, vol. 72, issue 3, 13-32

Abstract: We present a simple dynamic investment strategy that allows long-term passive investors to hedge climate risk without sacrificing financial returns. We illustrate how the tracking error can be virtually eliminated even for a low-carbon index with 50% less carbon footprint than its benchmark. By investing in such a decarbonized index, investors in effect are holding a “free option on carbon.” As long as climate change mitigation actions are pending, the low-carbon index obtains the same return as the benchmark index; but once carbon dioxide emissions are priced, or expected to be priced, the low-carbon index should start to outperform the benchmark.Editor’s note: The views expressed in this article are those of the authors and do not necessarily reflect the views of the Amundi Group, AP4, or MSCI.Editor’s note: This article was reviewed and accepted by Executive Editor Stephen J. Brown and Executive Editor Robert Litterman.

Date: 2016
References: Add references at CitEc
Citations: View citations in EconPapers (28)

Downloads: (external link)
http://hdl.handle.net/10.2469/faj.v72.n3.4 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:ufajxx:v:72:y:2016:i:3:p:13-32

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/ufaj20

DOI: 10.2469/faj.v72.n3.4

Access Statistics for this article

Financial Analysts Journal is currently edited by Maryann Dupes

More articles in Financial Analysts Journal from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().