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The Journal of Portfolio Management

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

Maximilian Görgen, Andrea Jacob and Martin Nerlinger
The Journal of Portfolio Management February 2021, 47 (3) 77-93; DOI: https://doi.org/10.3905/jpm.2020.1.200
Maximilian Görgen
is a research associate and doctoral candidate at the Chair of Finance and Banking at the University of Augsburg in Augsburg, Germany
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Andrea Jacob
is a research associate and doctoral candidate at the Chair of Finance and Banking at the University of Augsburg in Augsburg, Germany
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Martin Nerlinger
is a research associate and doctoral candidate at the Chair of Finance and Banking at the University of Augsburg in Augsburg, Germany
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Abstract

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.

TOPICS: Portfolio construction, ESG investing, risk management

Key Findings

  • ▪ We describe a capital markets–based approach to measuring carbon risk that stems from the transition from a carbon-based to a low-carbon economy.

  • ▪ Investors can integrate carbon risk into their portfolios using carbon beta but must be aware of the associated portfolio return, risk, and factor exposures.

  • ▪ Different portfolio strategies can achieve a desired level of carbon risk exposure. However, the risk is not remunerated proportionally in the financial market.

  • © 2021 Pageant Media Ltd
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The Journal of Portfolio Management: 47 (3)
The Journal of Portfolio Management
Vol. 47, Issue 3
February 2021
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Get Green or Die Trying? Carbon Risk Integration into Portfolio Management
Maximilian Görgen, Andrea Jacob, Martin Nerlinger
The Journal of Portfolio Management Jan 2021, 47 (3) 77-93; DOI: 10.3905/jpm.2020.1.200

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Get Green or Die Trying? Carbon Risk Integration into Portfolio Management
Maximilian Görgen, Andrea Jacob, Martin Nerlinger
The Journal of Portfolio Management Jan 2021, 47 (3) 77-93; DOI: 10.3905/jpm.2020.1.200
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  • Article
    • Abstract
    • MEASUREMENT OF CARBON RISK
    • CARBON BETA PORTFOLIOS
    • DIFFERENCES IN FACTOR EXPOSURES
    • FUNDAMENTAL MEASURE OF CARBON RISK
    • CARBON RISK INTEGRATION INTO INVESTMENT STRATEGIES
    • CONCLUSION
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