Cross-Asset Climate Betas

Jean-Charles Bertrand, Guillaume Coqueret (), Nicholas Mcloughlin and Stéphane Mesnard
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Jean-Charles Bertrand: HEC Paris - Ecole des Hautes Etudes Commerciales
Guillaume Coqueret: EM - EMLyon Business School

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Abstract: This article documents the sensitivity of asset returns to proxies of climate risk. We first construct a novel "extreme weather index" by combining meteorological observations with weather-related catastrophes data. We utilize this index, alongside a news-based indicator focused on climate concerns, to estimate climate "betas" for a cross section of asset classes. We deploy these betas in the context of adapting multi-asset portfolios to shocks in climate events or heightened media attention. We find that introducing new asset classes to a simple equity–bond portfolio, such as commodities, has an outsized impact compared with simply adjusting the type of investment strategy used within a pre-determined asset allocation. These additional asset classes improve portfolio diversification during times of climate stress but introduce a higher degree of tracking error and reduce risk-adjusted performance over the full sample period, highlighting a trade-off for portfolio construction.

Date: 2025-02-28
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Published in Journal of portfolio management, 2025, 51 (5), 143-163 p. ⟨10.3905/jpm.2025.1.672⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04907526

DOI: 10.3905/jpm.2025.1.672

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