Building Benchmark Portfolios with Decreasing Carbon Footprints

47 Pages Posted: 17 Dec 2021 Last revised: 30 Sep 2022

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

We build worldwide equity and corporate bond portfolios with decreasing carbon footprint, which passive investors can use as new Net-Zero benchmarks. Each year, we exclude the most polluting firrms from the portfolio and reallocate the proceeds so as to maintain the regional and sectoral exposures of the business-as- usual benchmark, therefore avoiding divestment from emerging countries. Reducing the equit portfolio carbon intensity by 10% every year (68% in 11 years) would be obtained by sequentially rebalancing up to 11% of the benchmark market value in 2020. This approach not only drastically decarbonizes the portfolio but also delivers the same risk-adjusted performance as the benchmark. We demonstrate that this approach is also effective for a corporate bond portfolio.

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 Benchmark 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 )

Extranef 232
Lausanne, 1012
Switzerland
+41 21 692 33 49 (Phone)

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

Swiss Finance Institute ( email )

40, Boulevard du Pont-d'Arve
40, Bd du Pont-d'Arve
1211 Geneva 4, CH-6900
Switzerland
+41 21 692 33 49 (Phone)

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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