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Sustainable portfolio management under climate change

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  • Mingyu Fang
  • Ken Seng Tan
  • Tony S. Wirjanto

Abstract

This paper discusses the management of climate change risks for equity investments and presents a scenario-based framework for building sustainable portfolios under the climate change scheme. An empirical analysis is first performed using historical price data to show the inferior risk-adjusted performance of the carbon-intensive industries in the North American stock market, which supplements evidence from existing literature in the market's gradual pricing of the climate change risk. Risk management modules are devised with subjective top-level constraints to achieve comprehensive coverage of the key aspects of climate change: risk exposures are measured by carbon intensities, while the risk impacts are quantified through equity return impact scenarios derived from climate change paths under Integrated Assessment Models. A model for quantifying stranded asset risk is also presented. Results from these modules formulate the joint posterior return distribution of the stocks that are used to construct the mean-variance optimal portfolio.

Suggested Citation

  • Mingyu Fang & Ken Seng Tan & Tony S. Wirjanto, 2019. "Sustainable portfolio management under climate change," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 9(1), pages 45-67, January.
    • Handle: RePEc:taf:jsustf:v:9:y:2019:i:1:p:45-67
    DOI: 10.1080/20430795.2018.1522583
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    Citations

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    Cited by:

    1. Muñoz, Fernando, 2021. "Carbon-intensive industries in Socially Responsible mutual funds' portfolios," International Review of Financial Analysis, Elsevier, vol. 75(C).
    2. Shashwat Mishra & Rishabh Raj & Siddhartha P. Chakrabarty, 2023. "Green portfolio optimization: A scenario analysis and stress testing based novel approach for sustainable investing in the paradigm Indian markets," Papers 2305.16712, arXiv.org.
    3. Kanwalroop K. Dhanda & Joseph Sarkis & Dileep G. Dhavale, 2022. "Institutional and stakeholder effects on carbon mitigation strategies," Business Strategy and the Environment, Wiley Blackwell, vol. 31(3), pages 782-795, March.
    4. Billio, Monica & Costola, Michele & Hristova, Iva & Latino, Carmelo & Pelizzon, Loriana, 2022. "Sustainable finance: A journey toward ESG and climate risk," SAFE Working Paper Series 349, Leibniz Institute for Financial Research SAFE.
    5. Siddhartha P. Chakrabarty & Suryadeepto Nag, 2023. "Risk measures and portfolio analysis in the paradigm of climate finance: a review," SN Business & Economics, Springer, vol. 3(3), pages 1-22, March.
    6. Cunha, Felipe Arias Fogliano de Souza & Meira, Erick & Orsato, Renato J. & Klotzle, Marcelo Cabus & Lucena, André F.P., 2021. "Do low-carbon investments in emerging economies pay off? Evidence from the Brazilian stock market," International Review of Financial Analysis, Elsevier, vol. 74(C).
    7. Brielle Lillywhite & Gregor Wolbring, 2022. "Risk Narrative of Emergency and Disaster Management, Preparedness, and Planning (EDMPP): The Importance of the ‘Social’," Sustainability, MDPI, vol. 15(1), pages 1-36, December.
    8. Izabela Horzela & Sławomir Gromadzki & Jarosław Gryz & Tomasz Kownacki & Aneta Nowakowska-Krystman & Marzena Piotrowska-Trybull & Radosław Wisniewski, 2021. "Energy Portfolio of the Eastern Poland Macroregion in the European Union," Energies, MDPI, vol. 14(24), pages 1-28, December.
    9. Lee, Dong-Young & Mehran, Muhammad Taqi & Kim, Jonghwan & Kim, Sangcho & Lee, Seung-Bok & Song, Rak-Hyun & Ko, Eun-Yong & Hong, Jong-Eun & Huh, Joo-Youl & Lim, Tak-Hyoung, 2020. "Scaling up syngas production with controllable H2/CO ratio in a highly efficient, compact, and durable solid oxide coelectrolysis cell unit-bundle," Applied Energy, Elsevier, vol. 257(C).

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