Carbon Footprint for Dynamically Rebalanced Portfolios

Abstract

The ambitious objective stated in the latest Paris Agreement 2015 to limit the average global increase in temperature to 2°C before preindustrial levels, and possibly to 1.5°C, will need a tectonic shift in infrastructure; energy production; industrial processes; and, at a smaller scale, our lifestyles. Because investors will play a key role in financing these objectives, they need a robust framework to measure the impact of their investments while monitoring long-term risk related to climate change. Derived from standard financial reporting, the authors propose such a framework to measure a complete carbon footprint for dynamically rebalanced funds. They enhance this framework with the derivation of the carbon performance attribution of funds versus their benchmarks, both for absolute (e.g., carbon emissions) and relative measures (e.g., carbon intensity).