Biodiversity and Climate: Friends or Foes? †

44 Pages Posted: 15 Apr 2024

Date Written: February 29, 2024

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

Suggested Citation

Bouyé, Eric and Deguest, Romain and Jurczenko, Emmanuel and Teiletche, Jerome, Biodiversity and Climate: Friends or Foes? † (February 29, 2024). Available at SSRN: https://ssrn.com/abstract=4778320 or http://dx.doi.org/10.2139/ssrn.4778320

Eric Bouyé

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Romain Deguest (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Emmanuel Jurczenko

EDHEC Business School ( email )

393 Promenades des Anglais
Nice, 06200
France
+330615174102 (Phone)

Jerome Teiletche

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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