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    Decarbonization Factors
    23 Oct 2019Working Paper Summaries

    Decarbonization Factors

    by Alex Cheema-Fox, Bridget LaPerla, George Serafeim, David Turkington, and Hui (Stacie) Wang
    This paper contributes to a growing knowledge base about how climate change impacts investor expectations, capital allocations and thereby pricing and returns. It provides actionable insights into how to decarbonize portfolios and evaluate the likely performance and carbon exposure differences across strategies.
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    Author Abstract

    In the face of accelerating climate change, investors are making capital allocations seeking to decarbonize portfolios by reducing the carbon emissions of their holdings. To understand the performance of portfolio decarbonization strategies and investor behavior towards decarbonization we construct decarbonization factors that go long low carbon intensity sectors, industries, or firms and short high carbon intensity. We consider several portfolio formation strategies and find strategies that lowered carbon emissions more aggressively performed better. Decarbonization factor returns are associated with contemporaneous institutional flows into the factors. Buying decarbonization factors when coincident flows are positive while selling when they are negative produces significantly positive alphas. Combining decarbonization factors that have positive contemporaneous flows would provide investors with significantly superior returns and continuous exposure to low carbon portfolios. The results are more pronounced in Europe relative to the U.S. Our results suggest that institutional investor flows contain information about anticipated fundamentals related to climate change developments.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: September 2019
    • HBS Working Paper Number: HBS Working Paper #20-037
    • Faculty Unit(s): Accounting and Management
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    George Serafeim
    George Serafeim
    Charles M. Williams Professor of Business Administration
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