Abstract
With scientific evidence regarding the contribution of carbon emissions to global warming mounting, pressure is building for corrective policy actions. The potential for such policies poses a risk for invested capital. We describe how bond investors using traditional portfolio construction techniques can hedge portfolios against this climate risk without introducing unintended exposures that could sacrifice the portfolio’s benchmark-tracking properties. We hypothesize how a pickup in low-carbon investing may send out a pricing signal and preempt the connoted price correction. In that event, the transition toward a world economy with a sustainable level of carbon pollution would be accelerated, which would be beneficial for both the low-carbon investor and the environment.
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