Carbon Negative Leveraged Investment Strategies

23 Pages Posted: 21 Aug 2021

See all articles by Ulf Erlandsson

Ulf Erlandsson

Anthropocene Fixed Income Institute

Date Written: August 12, 2021

Abstract

Measuring the impact of portfolio allocations in terms of non-pecuniary effects is becoming more mainstream in the financial industry. A logical extension to methodologies such as portfolio carbon footprinting is that more or less capital provisioning through leverage or short positions should
have increased/negative non-financial effects as well. Focusing on climate impact, this paper develops a stylized model where investor capital allocations drive total economy carbon emissions, and derive the carbon footprint attributable to the investor. In the model, using leverage in the
form of long-short short strategies, the investor can reduce or even make their footprint negative when their investment allocations drive (shifts of) cost-of-capital and full economy emissions reductions. In an empirical application using the iTraxx Main non-financial index, we demonstrate how a generic corporate bond exposure can achieve a zero or negative carbon footprint by using a leveraged long-short overlay. The findings should be useful in terms of repositioning traditional non-impact portfolios by using overlays as well as to validate and leverage already operational ESG
strategies.

Keywords: Climate change; portfolio management

JEL Classification: G12, Q54

Suggested Citation

Erlandsson, Ulf, Carbon Negative Leveraged Investment Strategies (August 12, 2021). Available at SSRN: https://ssrn.com/abstract=3906531 or http://dx.doi.org/10.2139/ssrn.3906531

Ulf Erlandsson (Contact Author)

Anthropocene Fixed Income Institute ( email )

c/o Erlandsson
Fogdev 4
Saltsjo-Duvnas, NA 13150
Sweden

HOME PAGE: http://www.anthropocenefii.org

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