The Market Measure of Carbon Risk and its Impact on the Minimum Variance Portfolio

15 Pages Posted: 8 Feb 2021

See all articles by Théo Roncalli

Théo Roncalli

University of Paris-Saclay

Théo Le Guenedal

CREST - ENSAE

Frederic Lepetit

Amundi Asset Management

Thierry Roncalli

Amundi Asset Management; University of Evry

Takaya Sekine

Amundi Asset Management

Date Written: January 25, 2021

Abstract

Like ESG investing, climate change is an important concern for asset managers and owners, and a new challenge for portfolio construction. Until now, investors have mainly measured carbon risk using fundamental approaches, such as with carbon intensity metrics. Nevertheless, it has not been proven that asset prices are directly impacted by these fundamental-based measures. In this paper, we focus on another approach, which consists in measuring the sensitivity of stock prices with respect to a carbon risk factor. In our opinion, carbon betas are market-based measures that are complementary to carbon intensities or fundamental-based measures when managing investment portfolios, because carbon betas may be viewed as an extension or forward-looking measure of the current carbon footprint. In particular, we show how this new metric can be used to build minimum variance strategies and how they impact their portfolio construction.

Keywords: carbon, climate change, risk factor, carbon beta, carbon intensity, minimum variance portfolio

JEL Classification: C61, G11

Suggested Citation

Roncalli, Théo and Le Guenedal, Théo and Lepetit, Frederic and Roncalli, Thierry and Sekine, Takaya, The Market Measure of Carbon Risk and its Impact on the Minimum Variance Portfolio (January 25, 2021). Available at SSRN: https://ssrn.com/abstract=3772707 or http://dx.doi.org/10.2139/ssrn.3772707

Théo Roncalli

University of Paris-Saclay ( email )

Avenue de la Terrasse
Gif Sur Yvette, 91198
France

Théo Le Guenedal

CREST - ENSAE ( email )

France

Frederic Lepetit

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015
France

Thierry Roncalli (Contact Author)

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015
France

University of Evry ( email )

Boulevard Francois Mitterrand
F-91025 Evry Cedex
France

Takaya Sekine

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015
France

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