An Impact of Greenhouse Gas Aversion on Optimal Portfolios
https://www.risk.net/journal-of-energy-markets/7959382/the-impact-of-greenhouse-gas-aversion-on-optimal-portfolios
Posted: 23 May 2023 Last revised: 14 May 2024
Date Written: May 19, 2023
Abstract
The notion of the greenhouse gas (GHG) aversion (GHGA) is introduced into the mean-variance portfolio (MVP) framework. GHGA is assumed to be a weighted sum of the portfolio holdings’ GHG emission intensities. A new portfolio performance measure, the GHGA-tilted Sharpe ratio, is offered for GHG-averse investors. While the classical Sharpe ratio may monotonically decrease with growing GHGA, the GHGA-tilted Sharpe ratio has a maximum at intermediate values of GHGA, which defines an optimal GHGA-based MVP. The main holdings of such a portfolio represent promising investment leads for socially responsible investors who do not want to abandon the “brown” industries altogether. An example of a GHGA-based MVP formed with the major constituents of the energy sector is discussed.
Keywords: portfolio choice, mean variance theory, GHG emissions
JEL Classification: G11, G12, G14, G24, G4, Q01, Q5
Suggested Citation: Suggested Citation
