The Market Measure of Carbon Risk and its Impact on the Minimum Variance Portfolio

Like environment, social, and governance investing, climate change is an important concern for asset managers owners a new challenge portfolio construction. Until now, investors have mainly measured carbon risk using fundamental approaches, such as with intensity metrics. Nevertheless, it has not been proven that prices are directly affected by these fundamental-based measures. In this article, the authors focus on another approach, which consists of measuring sensitivity stock respect to factor. authors’ opinion, betas market-based measures complementary intensities or when managing investment portfolios; may be viewed extension forward-looking measure current footprint. particular, they show how metric can used build minimum variance strategies affects TOPICS:ESG construction, tail risks, equity analysis Key Findings ▪ Measuring different if we consider approach metrics betas. Managing relative implies overweighting green firms, whereas absolute having zero exposure The first active management bet, second immunization strategy. Both specific systematic risks building justify combining market approaches risk.