Factor Investing in Paris : Managing Climate Change Risk in Portfolio Construction

Kolle, Janina and Lohre, Harald and Radatz, Erhard and Rother, Carsten (2022) Factor Investing in Paris : Managing Climate Change Risk in Portfolio Construction. Journal of Investment Management, 20 (4). pp. 35-51.

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The 2015 Paris Agreement is a landmark in limiting emissions and targeting global warming well below 2C, preferably 1.5C compared to pre-industrial levels. In this light, we investigate how to efficiently construct equity portfolios that help mitigating climate change risk but at the same time enable harvesting well-established return drivers such as value, momentum or quality. A pure reduction in greenhouse gas intensity or a divestment from fossil fuel sectors is not necessarily leading to a better temperature alignment of a portfolio. Given the limited set of temperature-aligned assets, keeping the average temperature increase below 2 degrees comes with considerable active risks. To this end, we propose a net zero portfolio construction framework that brings temperature alignment together with a reduction in carbon intensity while harvesting equity factor premia.

Item Type:
Journal Article
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Journal of Investment Management
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?? no - not funded ??
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18 Jul 2023 13:26
Last Modified:
15 Jul 2024 23:54