Abstract
This paper analyzes and contrasts the diversification benefits of gold and the volatility index VIX from a financial and sustainability perspective. We operationalize sustainability by means of carbon emissions and show that the addition of gold or the VIX to a diversified equity portfolio can reduce the portfolio’s carbon emissions per US dollar value and thus enhance the sustainability of the portfolio. Since gold is only mined once and does not involve recurring emissions, gold’s sustainability performance increases the longer the portfolio is held. Derivatives, including the VIX, reduce a portfolio’s carbon emissions per US dollar value even more because carbon emissions only occur at the underlying firm level and cannot be double-counted. Our study highlights the critical role of physical assets and derivatives in the sustainability analysis of investment portfolios.
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