Biodiversity and Climate: Friends or Foes? †

Abstract

We propose a portfolio optimization framework that jointly incorporates biodiversity and climate considerations. Our empirical application to sovereign bonds demonstrates that investors can construct portfolios that enhance both biodiversity and climate outcomes without sacrificing absolute risk-adjusted returns. While adding a biodiversity objective to a portfolio with an existing climate objective may slightly reduce relative performance, this reduction diminishes for more ambitious sustainable portfolios and dissipates when long-only constraints are removed. Our findings are robust across various choices of sustainability measures and modeling approaches.

Keywords: Biodiversity Risk, Climate Risk, Portfolio Optimization, Sustainability Trade-Offs, Sovereign Bonds, Tracking Error

JEL Classification: G11, G15, Q53, Q54, Q57