Net-Zero Carbon Portfolio Alignment

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

See all articles by Patrick Bolton

Patrick Bolton

Imperial College London; 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

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

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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