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.

Editor’s note: The authors’ firm may have a commercial interest in the topics discussed in this article.

Editor’s note: This article was reviewed and accepted by Executive Editor Stephen J. Brown.

Authors’ note: The views expressed in this article are those of the authors and do not necessarily reflect those of Amundi.

Author Information

Marielle de Jong is head of Fixed-Income Quant Research at Amundi, Paris.

Anne Nguyen is a consultant for Fixed-Income Quant Research at Amundi, Paris.

Related Topics

       Political Risk

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