Pension Hub / Sustainable Finance and Climate Risk

Dynamic Portfolio Decisions with
Climate Risk and Model Uncertainty

Alexey Rubtsov, Ph.D, Ryerson University, Global Risk Institute
Sally Shen, Ph.D., Global Risk Institute


ABOUT THIS PAPER:

Failure to act on climate change ranked No. 1 on the list of top ten global risks by severity over the
next ten years according to the World Economic Forum’s annual Global Risks Report. It has become
well understood that the impact of climate change on financial markets is highly uncertain and that
our society is only learning about it over time. Notwithstanding existing research, little is known
about the time horizon effects of climate uncertainty on optimal portfolio decisions, where climate
uncertainty is defined as uncertainty about probabilities of future climate trajectories. This paper
fills the gap and studies the impact of climate uncertainty on stock–bond–cash portfolios with short
to medium term investment horizons.

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