Net-Zero Carbon Portfolio Alignment. Issue 2 (3rd April 2022)

• Record Type: Journal Article
• Authors: Bolton, Patrick; Kacperczyk, Marcin; Samama, Frédéric
• Is Part Of: Financial analysts journal. Volume 78:Issue 2(2022)
• Page Start: 19
• Page End: 33
• Publication Date: 2022-04-03
• Subjects: benchmarking -- climate change -- net neutrality -- net-zero portfolio construction; 2.0; Investment analysis -- Periodicals; Investment analysis; HW_FM; Periodicals; Electronic journals; 332.6
• DOI: 10.1080/0015198X.2022.2033105
• Languages: English
• ISSNs: 0015-198X

Abstract

Abstract: We outline a simple and robust methodology to align portfolios with a science-based, carbon budget consistent with maintaining a temperature rise below 1.5 °C with 83% probability. We show how to keep the tracking error at a negligible level. This approach works for both passive and active managers. It also establishes an exit roadmap for carbon-intensive corporates, thereby generating a form of competition to decarbonize within each sector. We also discuss four sources of risks: uncertainty around a rapidly shrinking carbon budget, time impacts on decarbonization rates, implementation risk due to market-wide selling pressure, and uncertainty about taxes on polluting companies.