Carbon-Transition Risk and Net-Zero Portfolios

70 Pages Posted: 5 Oct 2023 Last revised: 21 Jun 2024

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 and to exert pressure on the polluting sector. We characterize the decision and timing to divest individual companies from NZP using a novel forwardlooking measure, distance-to-exit (DTE), which calculates the distance, in years, until a company gets excluded from NZP. Companies with greater DTE have higher valuation ratios and lower expected returns, consistent with the hypothesis that DTE captures uncertain institutional pressure to decarbonize and thus can be a useful tool to quantify carbon-transition risk.

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

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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