Building Benchmarks Portfolios with Decreasing Carbon Footprints

43 Pages Posted: 17 Dec 2021

See all articles by Eric Jondeau

Eric Jondeau

University of Lausanne - Faculty of Business and Economics (HEC Lausanne); Swiss Finance Institute; Swiss Finance Institute

Benoît Mojon

Bank for International Settlements (BIS)

Luiz A. Pereira da Silva

Bank for International Settlements (BIS)

Date Written: December 16, 2021

Abstract

In this paper, we build portfolios with decreasing carbon footprint, which passive investors can use as new Paris-consistent (PC) benchmarks and have the same risk- adjusted returns as business as usual (BAU) benchmarks. As the distribution of firms' carbon intensity is very skewed, excluding a small fraction of highly polluting firms can massively reduce the carbon footprint of a portfolio of corporate stocks. We identify the worst polluters globally, exclude them from the portfolio, and re- allocate the proceeds so as to keep sectoral and regional exposures similar to those of the business as usual (BAU) benchmark. This approach limits divestment from corporates in Emerging Countries that would result from implementing exclusions and reinvestment without the objective of preserving regional exposures. We show that reducing the carbon footprint of the portfolio by 64% in 10 years would be obtained by excluding sequentially up to 11% of the corporates, which together amount to less than 6% of the global market portfolio. While this reallocation preserves regional and sectoral exposures similar to those of the BAU benchmark, it does not change its risk-adjusted return. We define PC benchmark portfolios at the global level, for Emerging Countries, Europe, North America, and the Pacific.

Keywords: Portfolio carbon footprint, Green and brown assets, Alignment with Paris Agreement

JEL Classification: G11, G24, Q56

Suggested Citation

Jondeau, Eric and Mojon, Benoît and Pereira da Silva, Luiz A., Building Benchmarks Portfolios with Decreasing Carbon Footprints (December 16, 2021). Swiss Finance Institute Research Paper No. 21-91, Available at SSRN: https://ssrn.com/abstract=3987186 or http://dx.doi.org/10.2139/ssrn.3987186

Eric Jondeau (Contact Author)

University of Lausanne - Faculty of Business and Economics (HEC Lausanne) ( email )

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+41 21 692 33 49 (Phone)

HOME PAGE: http://people.unil.ch/ericjondeau/

Swiss Finance Institute ( email )

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Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Benoît Mojon

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Luiz A. Pereira da Silva

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/luiz_awazu_pereira_da_silva.htm

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