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Sustainable investing and climate transition risk: a portfolio rebalancing approach


Battiston, Stefano; Bressan, Giacomo; Monasterolo, Irene (2022). Sustainable investing and climate transition risk: a portfolio rebalancing approach. The Journal of Portfolio Management, 48(10):165-192.

Abstract

The authors study how greenness can be combined with other investment criteria to construct sets of corporate bonds portfolios with decreasing exposure to climate transition risk. They apply the methodology to the European Central Bank’s asset purchase program. They define a weaker market neutrality principle as investing proportionally to the bonds’ amount outstanding within Climate Policy Relevant Sectors. The portfolio rebalancing leads to a 10% reduction of exposure to climate transition risk. Then, the authors study the relation between bonds’ rebalancing and issuers’ Environmental, Social and Governance (ESG) characteristics and Greenhouse Gas (GHG) emissions. Bonds issued by firms with low (high) ESG risk and GHG emissions are more likely to be bought (sold) in the rebalancing. Finally, they analyse implications of portfolio rebalancing on financial markets finding that changes in yields would be limited to less than 80 basis points on individual bonds. The approach can contribute to inform climate-aware portfolio rebalancing and sustainable investment strategies.

Abstract

The authors study how greenness can be combined with other investment criteria to construct sets of corporate bonds portfolios with decreasing exposure to climate transition risk. They apply the methodology to the European Central Bank’s asset purchase program. They define a weaker market neutrality principle as investing proportionally to the bonds’ amount outstanding within Climate Policy Relevant Sectors. The portfolio rebalancing leads to a 10% reduction of exposure to climate transition risk. Then, the authors study the relation between bonds’ rebalancing and issuers’ Environmental, Social and Governance (ESG) characteristics and Greenhouse Gas (GHG) emissions. Bonds issued by firms with low (high) ESG risk and GHG emissions are more likely to be bought (sold) in the rebalancing. Finally, they analyse implications of portfolio rebalancing on financial markets finding that changes in yields would be limited to less than 80 basis points on individual bonds. The approach can contribute to inform climate-aware portfolio rebalancing and sustainable investment strategies.

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3 citations in Scopus®
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Additional indexing

Item Type:Journal Article, not_refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > Accounting
Social Sciences & Humanities > General Business, Management and Accounting
Social Sciences & Humanities > Finance
Social Sciences & Humanities > Economics and Econometrics
Scope:Discipline-based scholarship (basic research)
Language:English
Date:2022
Deposited On:01 Nov 2022 06:32
Last Modified:27 Apr 2024 01:40
Publisher:Pageant Media
ISSN:0095-4918
OA Status:Closed
Publisher DOI:https://doi.org/10.3905/jpm.2022.1.394
Other Identification Number:merlin-id:22680