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Article

Carbon Risk Integration With Factors

Bill Hao, Aye M. Soe and Kelly Tang
The Journal of Index Investing Fall 2018, jii.2018.1.061; DOI: https://doi.org/10.3905/jii.2018.1.061
Bill Hao
is director of Global Research & Design and the senior quantitative analyst at S&P Dow Jones Indices in New York, NY.
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Aye M. Soe
is managing director and head of Research & Design at S&P Dow Jones Indices in New York, NY.
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Kelly Tang
is a director of Global Research & Design and the ESG analyst at S&P Dow Jones Indices in New York, NY.
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Abstract

Integration of carbon risks into the investment process requires careful analysis of risk-return characteristics and factor exposures of resulting carbon efficient portfolios. In this article, we propose a stylized framework to integrate traditional style factors with carbon efficient portfolios for both U.S and developed Europe markets. The results show that although carbon efficient factor portfolios do achieve the objective of lowering carbon intensity, they generally have lower risk-adjusted returns than the pure factor portfolios. In addition, carbon efficient factor portfolios have lower exposure to the targeted factors, and the reductions in factor exposure are statistically significant.

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The Journal of Index Investing: 11 (3)
The Journal of Index Investing
Vol. 11, Issue 3
Winter 2020
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Carbon Risk Integration With Factors
Bill Hao, Aye M. Soe, Kelly Tang
The Journal of Index Investing Aug 2018, jii.2018.1.061; DOI: 10.3905/jii.2018.1.061

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Carbon Risk Integration With Factors
Bill Hao, Aye M. Soe, Kelly Tang
The Journal of Index Investing Aug 2018, jii.2018.1.061; DOI: 10.3905/jii.2018.1.061
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  • Article
    • Abstract
    • CURRENT CARBON INVESTING LANDSCAPE
    • LITERATURE REVIEW
    • CARBON RISK INTEGRATION WITH TRADITIONAL STYLE FACTORS
    • RELATIONSHIP OF CARBON INTENSITY WITH TRADITIONAL RISK FACTORS
    • INTEGRATING CARBON RISK WITH FACTOR PORTFOLIOS
    • COMBINING CARBON EFFICIENCY WITH FACTORS CHANGES RISK COMPOSITION MIX
    • A STYLIZED MULTIFACTOR FRAMEWORK
    • INTERNATIONAL EVIDENCE
    • CONCLUSION
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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  • PDF (Subscribers Only)

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