Net-Zero Carbon Portfolio Alignment

30 Pages Posted: 16 Sep 2021 Last revised: 22 Jan 2022

See all articles by Patrick Bolton

Patrick Bolton

Columbia University - Columbia Business School, Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Marcin T. Kacperczyk

Imperial College London - Accounting, Finance, and Macroeconomics; Centre for Economic Policy Research (CEPR)

Frédéric Samama

Sciences Po, S&P

Date Written: January 21, 2022

Abstract

We outline a simple and robust methodology to align portfolios with a science-based, carbon budget consistent with maintaining a temperature rise below 1.5oC with 83% probability. We show how to keep the tracking error at a negligible level. This approach works for both passive and active managers. It also establishes an exit roadmap for carbon-intensive corporates, thereby generating a form of competition to decarbonize within each sector. We also discuss four sources of risks: uncertainty around a rapidly shrinking carbon budget, time impacts on decarbonization rates, implementation risk due to market-wide selling pressure, and uncertainty about taxes on polluting companies.

Keywords: carbon neutrality, optimal portfolio, tracking error

JEL Classification: G12, G23, G30, D62

Suggested Citation

Bolton, Patrick and Kacperczyk, Marcin T. and Samama, Frederic, Net-Zero Carbon Portfolio Alignment (January 21, 2022). Available at SSRN: https://ssrn.com/abstract=3922686 or http://dx.doi.org/10.2139/ssrn.3922686

Patrick Bolton

Columbia University - Columbia Business School, Economics ( email )

420 West 118th Street
New York, NY 10027
United States

HOME PAGE: http://www0.gsb.columbia.edu/faculty/pbolton/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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

Marcin T. Kacperczyk

Imperial College London - Accounting, Finance, and Macroeconomics ( email )

South Kensington campus
London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Frederic Samama (Contact Author)

Sciences Po, S&P ( email )

40 Rue de Courcelles
Paris, 75017
France

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