A Portfolio Approach to Hedging Climate Risk

Marc Roston ()
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Marc Roston: Stanford Law School

Chapter Chapter 2 in Settling Climate Accounts, 2021, pp 15-38 from Springer

Abstract: Abstract This chapter describes methods for investors to integrate climate-related data into their portfolios through risk management techniques rather than by seeking outperformance. We demonstrate this risk management approach using the standard tools of modern portfolio theory and quantitative portfolio construction familiar to many investors. We argue that all investors would be well served by taking at least some steps down this path, whether by marginally modifying their exposures, or wholesale shifts in their portfolio benchmarks. Furthermore, some investors may choose to use more sophisticated long/short strategies to dramatically reduce their carbon exposures across entire investment portfolios.

Keywords: Carbon intensity; Capital Asset Pricing Model (CAPM); Mean–variance efficient portfolio; Tracking error; Information ratio; Factor model (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-030-83650-4_2

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DOI: 10.1007/978-3-030-83650-4_2

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