Get Green or Die Trying? Carbon Risk Integration into Portfolio Management

Portfolio management is confronting climate change more strongly and rapidly than expected. Risks arising from the transition from a brown, carbon-based to a green, low-carbon economy need to be integrated into portfolio and risk management. The authors show how to quantify these carbon risks by using a capital markets-based approach. Their measure of carbon risk, the carbon beta, can serve as an integral part of portfolio management practices in a more comprehensive way than fundamental carbon risk measures. Apart from other studies, the authors demonstrate that both green and brown stocks are risky per se, but there is no adequate remuneration in the financial market. In addition, carbon risk exposure is correlated with exposures to other common risk factors. This requires due diligence when integrating carbon risk in investment practices. By implementing carbon risk screening and best-in-class approaches, the authors find that investors can gain a desired level of carbon risk exposure, but this does not come without well-hidden costs.YYYYYYYY

Automated summary

Portfolio management is addressing climate change more proactively than expected, with a focus on transitioning to a green, low-carbon economy. The authors demonstrate how to quantify carbon risks using a capital markets-based approach. Their findings show that both green and brown stocks carry inherent risks without adequate financial compensation, and that carbon risk exposure is linked to other common risk factors. Integrating carbon risk into investment practices requires careful consideration to manage potential hidden costs.