Decarbonization Factors

44 Pages Posted: 14 Sep 2019 Last revised: 18 Sep 2019

See all articles by Alexander Cheema-Fox

Alexander Cheema-Fox

State Street Associates

Bridget Realmuto LaPerla

State Street Associates

George Serafeim

Harvard University - Harvard Business School

David Turkington

State Street Associates

Hui (Stacie) Wang

State Street Associates

Date Written: August 20, 2019

Abstract

In the face of accelerating climate change, investors are making capital allocations seeking to decarbonize portfolios by reducing the carbon emissions of their holdings. To understand the performance of portfolio decarbonization strategies and investor behavior towards decarbonization we construct decarbonization factors that go long low carbon intensity sectors, industries, or firms and short high carbon intensity. We consider several portfolio formation strategies and find strategies that lowered carbon emissions more aggressively performed better. Decarbonization factor returns are associated with contemporaneous institutional flows into the factors. Buying decarbonization factors when coincident flows are positive while selling when they are negative produces significantly positive alphas. Combining decarbonization factors that have positive contemporaneous flows would provide investors with significantly superior returns and continuous exposure to low carbon portfolios. The results are more pronounced in Europe relative to the US. Our results suggest that institutional investor flows contain information about anticipated fundamentals related to climate change developments.

Keywords: climate change, ESG, investment management, factor investing, investor behavior

Suggested Citation

Cheema-Fox, Alexander and LaPerla, Bridget Realmuto and Serafeim, George and Turkington, David and Wang, Hui, Decarbonization Factors (August 20, 2019). Available at SSRN: https://ssrn.com/abstract=3448637 or http://dx.doi.org/10.2139/ssrn.3448637

Alexander Cheema-Fox

State Street Associates ( email )

140 Mount Auburn St
Cambridge, MA 02139
United States

Bridget Realmuto LaPerla

State Street Associates ( email )

One Lincoln Street
Boston, MA 02111-2900
United States

George Serafeim (Contact Author)

Harvard University - Harvard Business School ( email )

381 Morgan Hall
Boston, MA 02163
United States

HOME PAGE: http://goo.gl/q4cJ5A

David Turkington

State Street Associates ( email )

United States

Hui Wang

State Street Associates

140 Mt Auburn St
Cambridge, MA 02138
United States

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