Climate Change Investment Risk: Optimal Portfolio Construction Ahead of the Transition to a Lower-Carbon Economy

Davide Benedetti, Enrico Biffis, Fotiz Chatzimichalakis

2019 | Academic | Climate, Net-Zero, Portfolio Construction, Risk & Performance

We proposed a methodology that can be used by institutional investors to assess and manage this transition risk, while also taking account of changing information on risk. We find that investors could reduce ex-post risk by lowering the weightings of some fossil fuel stocks with corresponding higher weightings in lower-risk fossil fuel stocks and/or in the stocks of companies active in energy efficiency markets.