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Building portfolios of sovereign securities with decreasing carbon footprints

Gong Cheng, Eric Jondeau and Benoit Mojon

No 1038, BIS Working Papers from Bank for International Settlements

Abstract: We propose a strategy to build portfolios of sovereign securities with progressively declining carbon footprints. Passive investors could use it as a new Paris-consistent benchmark to construct a "net zero" (NZ) portfolio while tracking closely the risk-adjusted returns of a business-as-usual (BAU) benchmark. Our strategy rewards sovereign issuers that have made stronger efforts in reducing carbon intensity, measured by total domestic emissions per capita. The NZ portfolio would have reduced carbon intensity by 41% between 2014 and 2019, by assigning higher weights to countries that have had lower carbon emissions. Among advanced economies, rebalancing leads to raising shares of France, Italy and Spain in the portfolio at the expense of the United States. And among emerging market economies, this leads to higher shares for Chile, the Philippines and Romania at the expense of China. Importantly, the NZ portfolio retains the same creditworthiness as the BAU benchmark without entailing materially higher foreign exchange risks.

Keywords: carbon footprints; sovereign debt; portfolio rebalancing; portfolio optimisation; active share; tracking error (search for similar items in EconPapers)
JEL-codes: G11 G24 Q56 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2022-09
New Economics Papers: this item is included in nep-ene, nep-env, nep-ifn, nep-sea and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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