(Car)bon voyage: The road to low-carbon investment portfolios

Christopher Palazzolo, Lukasz Pomorski and Alice Zhao

This chapter will discuss how an investment portfolio could dramatically reduce its carbon footprint, potentially even achieving “net zero”.¹¹ Net zero implies a combination of reducing carbon output and offsetting remaining emissions. The central message is that very large carbon reductions are feasible but not as straightforward as some commentators might suggest. The usual approach of security selection (eg, divesting from firms with the highest emissions) can lead to a substantial carbon reduction, but will not be enough for investors with the most ambitious reduction targets. Such investors will need other techniques to achieve their goals – for example, shorting high carbon footprint companies or trading instruments such as carbon offsets and carbon permits. Here, we discuss the pros and cons of such techniques and their importance to allocators travelling on the road towards net zero.

Investors are increasingly interested in meaningfully reducing or even fully eliminating exposure to carbon emissions through their investment portfolios (Ferris, 2020; Kalvapalle, 2020; Jessop, 2020; Gillespie, 2020). Demonstrating this commitment to protecting the planet from the risks of