Climate Change and Environmental Risks

Managing Carbon Risk: A Look at Environmentally Conscious Indices

Authors: Alex LaPlante, Global Risk Institute, Charlotte Watson, Global Risk Institute


Increasingly, governments around the globe are implementing more stringent climate policies to help stimulate the transition to lower-carbon economies. This transition brings with it both risks and opportunities for the financial sector. Consequently, financial institutions should be assessing the climate risk exposure of their investment portfolios as well as considering alternative investment strategies that take advantage of the new opportunities that climate change brings. In this study, we compare the carbon intensity and performance of ‘green’ equities portfolios (environmentally conscious indices) and traditional market portfolios (market indices). Although there are still limitations to the available emissions data that is currently available, the findings indicate that green investing can produce competitive returns while offering lower carbon exposure and conceivably, carbon risk mitigation. This is not to say that one should divest from all carbon intensive companies; our findings simply indicate that it is possible to address the carbon risk of equity portfolios in a profitable way.

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