(Car)Bon Voyage: The Road to Low Carbon Investment Portfolios

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See all articles by Christopher Palazzolo

Christopher Palazzolo

AQR Capital Management, LLC

Lukasz Pomorski

AQR Capital Management, LLC

Alice Zhao

AQR Capital Management, LLC

Date Written: December 21, 2020

Abstract

We discuss how an investment portfolio could dramatically reduce its carbon footprint, potentially even achieving ‘net zero.’ Our central message is that very large carbon reductions are feasible but not as straightforward as some commentators suggest. The usual approach of security selection (e.g., divesting from firms with highest emissions) can lead to a substantial carbon reduction but will not be enough for investors with the most ambitious reduction targets. Such investors will need other techniques to achieve their goals, for example shorting high carbon-footprint companies or trading instruments such as carbon offsets and carbon permits. We discuss the pros and cons of such techniques and their importance to allocators traveling on the pathway toward net zero.

Keywords: carbon, greenhouse gas emissions, climate, net zero, ESG, socially responsible investing

JEL Classification: D62, G11, G23, M14, Q5

Suggested Citation

Palazzolo, Christopher and Pomorski, Lukasz and Zhao, Alice, (Car)Bon Voyage: The Road to Low Carbon Investment Portfolios (December 21, 2020). Available at SSRN: https://ssrn.com/abstract=

Christopher Palazzolo

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Lukasz Pomorski (Contact Author)

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Alice Zhao

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

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