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Top-Down Portfolio Implications of Climate Change

Yesim Tokat-Acikel, Marco Aiolfi, Lorne Johnson, John Hall and Jessica (Yiwen) Jin
The Journal of Portfolio Management Novel Risks 2021, jpm.2021.1.279; DOI: https://doi.org/10.3905/jpm.2021.1.279
Yesim Tokat-Acikel
is director of Multi-Asset Research and portfolio manager at QMA in Newark, NJ
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Marco Aiolfi
is director of Systematic Multi-Asset Strategies and portfolio manager at QMA in Newark, NJ
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Lorne Johnson
is director of Institutional Solutions and portfolio manager at QMA in Newark, NJ
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John Hall
is a senior investment associate at QMA in Newark, NJ
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Jessica (Yiwen) Jin
is a senior investment associate at QMA in Newark, NJ
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Abstract

This article reviews the significant progress in academic research on economic impact of climate change and explores the implications for expected returns and strategic portfolio allocation across major public asset classes. There have been numerous efforts to measure the environmental impact within a broader environment, social, and governance framework with a focus on microeconomic and firm-level implications. In this article, the authors assess the impact of climate change on long-term expected returns across asset classes from a top-down macroeconomic perspective. They use well-accepted climate risk scenarios to assess the potential impact of alternative climate scenarios on economic growth, inflation, and asset returns for major asset classes. Finally, they design hypothetical portfolios given these top-down assumptions and explore portfolio allocation implications.

TOPICS: ESG investing, legal/regulatory/public policy, tail risks, portfolio construction

Key Findings

  • ▪ The authors assess the top-down cross-asset impact of climate change for strategic asset allocation in both optimistic and pessimistic scenarios.

  • ▪ The top-down analysis suggests that growth-oriented assets, such as equities, would be directly affected by climate change. Their return would decline in the pessimistic scenario, with significant differences across countries.

  • ▪ Using these strategic return expectations, a top-down climate risk–aware portfolio would tilt away from regions and assets that are expected to be adversely affected, particularly certain emerging markets, for better risk-adjusted returns.

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The Journal of Portfolio Management: 48 (5)
The Journal of Portfolio Management
Vol. 48, Issue 5
April 2022
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Top-Down Portfolio Implications of Climate Change
Yesim Tokat-Acikel, Marco Aiolfi, Lorne Johnson, John Hall, Jessica (Yiwen) Jin
The Journal of Portfolio Management Jul 2021, jpm.2021.1.279; DOI: 10.3905/jpm.2021.1.279

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Top-Down Portfolio Implications of Climate Change
Yesim Tokat-Acikel, Marco Aiolfi, Lorne Johnson, John Hall, Jessica (Yiwen) Jin
The Journal of Portfolio Management Jul 2021, jpm.2021.1.279; DOI: 10.3905/jpm.2021.1.279
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  • Article
    • Abstract
    • THE ECONOMIC IMPACTS OF CLIMATE CHANGE
    • INCORPORATING CLIMATE SCENARIOS IN LONG-TERM CAPITAL MARKET ASSUMPTIONS
    • PORTFOLIO ALLOCATION IMPLICATIONS OF CLIMATE CHANGE
    • CONCLUSION
    • ACKNOWLEDGMENTS
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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