Measuring and Optimizing the Risk and Reward of Green Portfolios

Lo, Andrew W.; Zhang, Ruixun; Zhao, Chaoyi

doi:10.3905/jesg.2022.1.062

Cited by 8 publications

(4 citation statements)

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“… 2021 ), climate shock factors (Lo et al. 2022 ), volatility and market timing (Ji et al. 2021 ), event factors (such as the Paris Agreement) (Monasterolo and De Angelis 2020 ), and an expected growth factor (Pastor et al.…”

Section: The Risk Measures: Carbon Premium and Other Measuresmentioning

confidence: 99%

“… 2020 ; Lo et al. 2022 ), the European Union (Oestreich and Tsiakas 2015 ; Ravina and Hentati Kaffel 2019 ; Monasterolo and De Angelis 2020 ; Alessi et al. 2021 ; Bernardini et al.…”

Section: The Risk Measures: Carbon Premium and Other Measuresmentioning

confidence: 99%

“…2022 ; Lo et al. 2022 ; Pastor et al. 2022 ), and for data across the globe (Monasterolo and De Angelis 2020 ; Walkshäusl 2021 ; Gurvich and Creamer 2022 ).…”

Section: The Risk Measures: Carbon Premium and Other Measuresmentioning

confidence: 99%

“…( 2022 ) 2022 FFE – Lo et al. ( 2022 ) 2022 FFE Mixed Meyer ( 2022 ) 2022 FFE Negative Park et al. ( 2022 ) 2022 FFE Positive Pastor et al.…”

Section: The Risk Measures: Carbon Premium and Other Measuresunclassified

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Risk measures and portfolio analysis in the paradigm of climate finance: a review

Chakrabarty

Nag

2023

SN Bus Econ

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Climate change brings with it new risks for the finance sector, which in turn provides new opportunities to mitigate this risk, emanating from climate change. To invest sustainably and move away from firms that have disproportionately high carbon footprints, investors need suitable risk measures and appropriate portfolio management approaches. In this paper, we conduct a review of the mathematical models used to measure carbon risk. Subsequently, we review portfolio optimization models based on modern portfolio theory and the incorporation of risk measures into portfolio optimization strategies. We find that there is a lack of consensus about the existence of a carbon premium or an equity greenium in stock prices. We also find that the literature on portfolio optimization techniques is comparatively nascent.

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Section: The Risk Measures: Carbon Premium and Other Measuresmentioning

confidence: 99%

“… 2020 ; Lo et al. 2022 ), the European Union (Oestreich and Tsiakas 2015 ; Ravina and Hentati Kaffel 2019 ; Monasterolo and De Angelis 2020 ; Alessi et al. 2021 ; Bernardini et al.…”

Section: The Risk Measures: Carbon Premium and Other Measuresmentioning

confidence: 99%

“…2022 ; Lo et al. 2022 ; Pastor et al. 2022 ), and for data across the globe (Monasterolo and De Angelis 2020 ; Walkshäusl 2021 ; Gurvich and Creamer 2022 ).…”

Section: The Risk Measures: Carbon Premium and Other Measuresmentioning

confidence: 99%

“…( 2022 ) 2022 FFE – Lo et al. ( 2022 ) 2022 FFE Mixed Meyer ( 2022 ) 2022 FFE Negative Park et al. ( 2022 ) 2022 FFE Positive Pastor et al.…”

Section: The Risk Measures: Carbon Premium and Other Measuresunclassified

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Risk measures and portfolio analysis in the paradigm of climate finance: a review

Chakrabarty

Nag

2023

SN Bus Econ

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The carbon premium: Correlation or causality? Evidence from S&P 500 companies

Sankar,

Nag,

Chakrabarty

et al. 2024

Energy Economics

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Quantifying the Impact of Impact Investing

Lo,

Zhang

2024

Management Science

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We propose a quantitative framework for assessing the financial impact of any form of impact investing, including socially responsible investing; environmental, social, and governance (ESG) objectives; and other nonfinancial investment criteria. We derive conditions under which impact investing detracts from, improves on, or is neutral to the performance of traditional mean-variance optimal portfolios, which depends on whether the correlations between the impact factor and unobserved excess returns are negative, positive, or zero, respectively. Using Treynor–Black portfolios to maximize the risk-adjusted returns of impact portfolios, we derive an explicit and easily computable measure of the financial reward or cost of impact investing as compared with passive index benchmarks. We illustrate our approach with applications to biotech venture philanthropy, a semiconductor research and development consortium, divesting from “sin” stocks, ESG investments, and “meme” stock rallies such as GameStop in 2021. This paper was accepted by Agostino Capponi, finance. Funding: Research funding from the National Key Research and Development Program of China [Grant 2022YFA1007900], the National Natural Science Foundation of China [Grant 12271013], Peking University’s Fundamental Research Funds for the Central Universities, and the Massachusetts Institute of Technology Laboratory for Financial Engineering is acknowledged. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.01168 .

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Measuring and Optimizing the Risk and Reward of Green Portfolios

Cited by 8 publications

References 0 publications

Risk measures and portfolio analysis in the paradigm of climate finance: a review

Risk measures and portfolio analysis in the paradigm of climate finance: a review

The carbon premium: Correlation or causality? Evidence from S&P 500 companies

Quantifying the Impact of Impact Investing

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