Designing Carbon-Neutral Investment Portfolios

Abstract

As climate change and global warming are addressed by tougher regulation, global investors are increasingly treating climate risks as a key aspect when pricing financial assets and deciding the allocation of their investment portfolios. However, the current approaches to embed the environmental profile in the investment process—exclusion lists, environmental ratings, active ownership, and carbon risk-adjusted valuation metrics—may not address effectively the concern that portfolios are exposed to growingly material risks associated to climate change. This chapter discusses to what extent financial hedging of institutional investment portfolios is feasible and how policy-making could shape markets and instruments to make the financial global system more resilient to possible climate-related regulatory shocks.