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- Title
Look Up! A Market Measure of the Long-Term Transition Risks in Equity Portfolios.
- Authors
Bouchet, Vincent; Vaucher, Benoit; Herzog, Benjamin
- Abstract
The transition to a low-carbon economy generates new regulatory, technological, market, and reputational risks for the financial sector. These climate-transition risks are mainly analyzed by portfolio managers through bottom-up fundamental approaches such as prospective scenario analysis and company scores. In order to overcome the difficulty of linking climate-transition risks with financial risks and the lack of data, recent research has investigated the impact of these risks on market prices by constructing dedicated factors. This article contributes to this literature in two ways. First, the authors propose a new climate-transition factor that captures both the sectoral and intrasectoral dimension of the transition to a low-carbon economy. Second, instead of trying to add this factor to a multifactor model, the authors propose to disentangle the effect of climate-transition risks from traditional risks. Their approach thus enables investors to quantify and optimize the amount of risk coming from their exposure to transition-sensitive instruments.
- Subjects
CAPITAL allocation; SUSTAINABLE investing; RENEWABLE energy transition (Government policy); MARKET prices
- Publication
Journal of Impact & ESG Investing, 2023, Vol 4, Issue 2, p95
- ISSN
2693-1982
- Publication type
Article
- DOI
10.3905/jesg.2023.1.084