Carbon-Transition Risk and Net-Zero Portfolios

67 Pages Posted: 5 Oct 2023 Last revised: 27 Nov 2023

See all articles by Gino Cenedese

Gino Cenedese

Fulcrum Asset Management

Shangqi Han

Fulcrum Asset Management

Marcin T. Kacperczyk

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

Date Written: September 11, 2023

Abstract

Net-zero portfolios (NZP), which aim to reduce carbon footprint exposure to zero by a target date, are becoming a popular vehicle to align investors' incentives with climate scenarios. We characterize the decision and timing to divest companies from NZP using a novel forward-looking measure, distance-to-exit (DTE), which calculates the distance, in years, until a company gets excluded from NZP. Companies with greater DTE values have higher valuation ratios and lower expected returns, consistent with the idea that DTE captures carbon-transition risk. The effect is stronger when climate pressure intensifies, and it is robust to various specification choices.

Keywords: net-zero portfolios, carbon-transition risk, dynamic divestment, engagement, decarbonization

JEL Classification: G11, G12, G23, G30, D62

Suggested Citation

Cenedese, Gino and Han, Shangqi and Kacperczyk, Marcin T., Carbon-Transition Risk and Net-Zero Portfolios (September 11, 2023). Available at SSRN: https://ssrn.com/abstract=4565220 or http://dx.doi.org/10.2139/ssrn.4565220

Gino Cenedese

Fulcrum Asset Management ( email )

66 Seymour Street
London, W1H 5BT
United Kingdom

Shangqi Han

Fulcrum Asset Management ( email )

66 Seymour Street
London, W1H 5BT
United Kingdom

Marcin T. Kacperczyk (Contact Author)

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

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