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Net-Zero Carbon Portfolio Alignment

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  • Patrick Bolton
  • Marcin Kacperczyk
  • Frédéric Samama

Abstract

We outline a simple and robust methodology to align portfolios with a science-based, carbon budget consistent with maintaining a temperature rise below 1.5 °C with 83% probability. We show how to keep the tracking error at a negligible level. This approach works for both passive and active managers. It also establishes an exit roadmap for carbon-intensive corporates, thereby generating a form of competition to decarbonize within each sector. We also discuss four sources of risks: uncertainty around a rapidly shrinking carbon budget, time impacts on decarbonization rates, implementation risk due to market-wide selling pressure, and uncertainty about taxes on polluting companies.

Suggested Citation

  • Patrick Bolton & Marcin Kacperczyk & Frédéric Samama, 2022. "Net-Zero Carbon Portfolio Alignment," Financial Analysts Journal, Taylor & Francis Journals, vol. 78(2), pages 19-33, April.
    • Handle: RePEc:taf:ufajxx:v:78:y:2022:i:2:p:19-33
    DOI: 10.1080/0015198X.2022.2033105
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    Cited by:

    1. Farah Durani, 2024. "Time-varying Relationship between Fossil Fuel-Free Energy Indices and Economic Uncertainty: Global Evidence from Wavelet Coherence Approach," International Journal of Energy Economics and Policy, Econjournals, vol. 14(1), pages 663-672, January.

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