Abstract
The financial sector, particularly investors, can make a significant contribution to the fight against climate change. They can drive the green transition by participating in emissions trading systems with carbon emission allowances. These allowances are suitable for responsible investing as they create economic incentives for climate action. From an investor’s perspective the question of ...
Abstract
The financial sector, particularly investors, can make a significant contribution to the fight against climate change. They can drive the green transition by participating in emissions trading systems with carbon emission allowances. These allowances are suitable for responsible investing as they create economic incentives for climate action. From an investor’s perspective the question of financial performance always arises. This article investigates whether and in which way the inclusion of the liquid investable global carbon index, which includes the major and most traded European and North American cap-and-trade programs, can improve the performance of multi-asset portfolios. We model different portfolio- and investortypes, evaluate their performance, and study the contribution of carbon during different market phases and economic environments. Portfolios incorporating carbon exhibit superior performance in terms of (risk-adjusted) returns and an elevated conditional diversification benefit. The advantages for more risk-seeking investors tend to be more pronounced than those for rather conservative ones. Our findings underline the role of carbon markets as catalyst for portfolio growth and responsible investing, providing valuable insights for investors and researchers.
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