‘Carbon beta is an additional climate risk indicator above and beyond traditional carbon data’

‘Carbon beta is an additional climate risk indicator above and beyond traditional carbon data’

05-04-2022 | Interview
Research findings on a novel measure of climate risk – carbon beta – were presented at a prestigious National Bureau of Economic Research (NBER) conference. We discuss this with Joop Huij, Head of Sustainable Index Solutions at Robeco, and Dries Laurs, Sustainable Index Solutions Researcher.
  • Joop  Huij
    Head of Indices
  • Dries  Laurs
  • Lusanele Magwa
    Investment Writer

Speed read

  • Carbon beta incorporates forward-looking information on climate risk
  • The metric provides insights on firms’ preparedness (leaders versus laggards) for the transition
  • It can potentially complement carbon emissions data as a portfolio climate risk control

Dries, can you briefly tell us about yourself and the innovative research project you were involved in?

Dries Laurs: “Sure. As a member of the Robeco PhD program, I’m a researcher in the Sustainable Index Solutions team and a PhD candidate at Vrije Universiteit Amsterdam. For my PhD research, I’m focusing on how climate change affects financial markets and how investors can deal with this issue. In line with this, I recently co-authored my first paper 1 with two professors from the university, Philip Stork and Remco Zwinkels, as well as Joop Huij, who is one of my PhD supervisors and Head of Sustainable Index Solutions at Robeco. Our study is on ‘carbon beta’ which is a market-based indicator of climate risk. This measure reflects how assets, for example global equities or commodities, comove with a carbon risk factor. The results from our research validated our concept and we were also invited to present our paper at an NBER conference.”
Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates

What does the Robeco PhD program entail?

Joop Huij: “People are at the heart of any asset management business. Therefore, Robeco always looks to recruit the best talent. As a part-time professor of finance at the Rotterdam School of Management, I have the privilege of teaching many students. This platform allows me to ‘scout’ for exceptional candidates who can potentially participate in our PhD program at Robeco. We set up this initiative several years ago and its success is characterized by the hugely impactful research the company has benefited from. With Dries, we are lucky to have another top talent and this is clearly reflected by his work on the carbon beta research project and the invitation he received to present at an NBER conference.”

What is the carbon beta paper about?

D.L.: “In our paper, we introduce a measure of asset-level climate risk exposure that is determined by how an asset’s return is correlated with a carbon risk factor. An asset with a negative carbon beta, for example, tends to have high returns when carbon risks increase. Such an asset can be seen as a ‘climate hedge’ as it pays off in times when investors are especially concerned about climate change. The opposite is true for an asset with a high carbon beta as it typically has low returns when carbon risks increase. We test our concept in several ways. First, we extensively validate our carbon beta estimates. For instance, we find the highest carbon betas in the energy, materials and utilities sectors. These industries generally have very high emissions. We also observe robust associations between carbon beta and emissions, emission intensities, green scores, and academic measures of climate change exposure.”

Figure 1 | Average carbon beta per industry group

Source: The sample consists of common equities in the CRSP-Compustat universe traded on the NYSE, Nasdaq, or AMEX. The sample period is from January 2007 to December 2020.
“Second, we investigate the predictive ability of carbon beta for asset returns around periods associated with materializing climate risk. In establishing a proxy for such materializations, we focus on the textual similarities of authoritative texts on climate change – for example frequently used word combinations in Intergovernmental Panel on Climate Change (IPCC) reports – with articles in the Wall Street Journal in a month. Thus, we assume that months with high volumes of news linked to climate change indicate uncertainty around future climate policy. In mapping out US climate policy uncertainty over time, we see spikes in uncertainty during Conference of the Parties (COP) events, after the publication of major IPCC reports on climate, and around the elections of both Donald Trump and Joe Biden. We find that stocks with higher carbon betas have lower returns in these periods of elevated climate risk, and vice versa. Similarly, we also assume negative realizations of climate risk in months with unusually high temperatures or extreme drought conditions and observe a similar effect on stock returns.”

Figure 2 | US Climate Policy Uncertainty Index

Source: Climate policy uncertainty is determined by the textual similarities between authoritative texts on climate change and articles in the Wall Street Journal. The sample period is from January 2007 to December 2020.
“In our study, we find that these events associated with elevated climate risk typically result in stocks with higher carbon betas experiencing lower returns. Lastly, we look into green innovation and find that within industries, companies with lower carbon betas are usually more active in patenting green technologies. This relationship, however, does not exist when one analyzes a firm’s emissions or emission intensity. Therefore, we believe carbon beta is an additional climate risk indicator above and beyond traditional carbon data.”

Figure 3 | Average annualized returns for US stocks with low, neutral and high carbon beta in months with high climate policy uncertainty

Source: The months in which climate policy uncertainty ranks above the 80th percentile are classified as periods with “high climate policy uncertainty”. The sample consists of common equities in the CRSP-Compustat universe traded on the NYSE, Nasdaq, or AMEX. The sample period is from January 2007 to December 2020.

What are the advantages of carbon beta compared with traditional carbon emissions data?

J.H.: “We see carbon beta as a tool for climate risk management. In terms of its advantages over carbon emissions data, carbon beta incorporates current market-based information (no two-year lag) and market expectations, thus making it a more actual and perhaps even forward-looking measure. Carbon beta has wide coverage, as market data is available for virtually all listed companies, and has high transparency, as it is not dependent on voluntary disclosures. And perhaps its most attractive feature is that it not only identifies companies that are vulnerable (laggards) to the low-carbon transition, but also identifies those that are expected to benefit (leaders) from it. This is something generic emission characteristics are unable to do.”

So what’s the most practical implication from your study?

D.L.: “There are some pertinent takeaways from our findings on carbon beta and green innovation. In line with previous research2, we confirm in our paper that green innovation is driven primarily by the energy and materials sectors. Within these industries, the more innovative firms have lower carbon betas, although they do not necessarily have lower reported carbon emissions or emission intensities. In other words, investors should not just simply divest from these high carbon emitters as these ‘green innovators’ are essential for the energy transition. Therefore, holding these types of firms is likely to lower the climate risk of a portfolio.”

“We find that some companies that look ‘clean’ based on their low reported emissions data actually have a high carbon beta. For example, some smaller firms that provide services to the oil & gas sector do not have high-carbon emitting operations, but they are economically vulnerable to a low-carbon transition. By contrast, some businesses considered to be ‘high-polluting’ based on their high reported emissions data in fact have a low carbon beta as they are better prepared for the transition. For instance, this could be due to them actively researching green technologies. A good example is a US multinational that is active in the field of power generation. Despite ranking in the top 5% of greenhouse gas emitters in our sample, it is also one of the top three issuers of green patents. Thus, its carbon beta is among the lowest in the industrials sector.”

What will Robeco do with these findings?

J.H.: “Alongside our climate strategist, Lucian Peppelenbos, we are currently investigating if carbon beta can function as an additional measure of climate risk within Robeco’s climate analytics toolkit. We believe carbon beta complements the current toolkit as it provides insights on carbon risk above and beyond those garnered from traditional carbon emissions data. Indeed, carbon beta has forward-looking information embedded in it, while carbon emissions data is backward-looking in nature. We also believe that the carbon beta metric can provide value for outlining portfolio climate risks. Whereas climate value at risk measures are based on complex, opaque models, carbon beta is a more intuitive, transparent and straightforward measure. Hence, we will also explore whether it can be integrated in Robeco’s investment strategies as a climate risk control.”

1 Huij, J., Laurs, D., Stork, P. A., and Zwinkels, R. C. J., November 2021, “Carbon beta: a market-based measure of climate risk“, SSRN working paper.
2 Cohen, L., Gurun, U. G., and Nguyen, Q., January 2021, “The ESG-innovation disconnect: evidence from green patenting”, SSRN working paper.

  Background to sustainability metrics

In defining sustainability, investors have a multitude of dimensions and metrics they could consider. For example:

  • Values-based exclusions
  • ESG integration
  • Impact investing

ESG scores typically put more focus on the operations of a business, whereas SDG scores also incorporate the impact that the business' products and/or services have on society.

We see client sustainability objectives increasingly moving towards avoiding controversial businesses (values-based exclusions) and including those that provide sustainable solutions (impact investing). In the first few articles of our Indices Insights series, we will empirically show how the different sustainability metrics (negative screening/exclusions, ESG, SDG) relate to the increasingly impact-oriented client sustainability objectives.


Important information

The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.



1. General
Please read this information carefully.

This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. The Company does not hold client assets and is subject to the licensing condition that it shall seek the SFC’s prior approval before extending services at retail level. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.

2. Important risk disclosures
2. Important risk disclosures Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:

  • Some Funds are subject to investment, market, equities, liquidity, counterparty, securities lending and foreign currency risk and risk associated with investments in small and/or mid-capped companies.
  • Some Funds are subject to the risks of investing in emerging markets which include political, economic, legal, regulatory, market, settlement, execution, counterparty and currency risks.
  • Some Funds may invest in China A shares directly through the Qualified Foreign Institutional Investor (“QFII”) scheme and / or RMB Qualified Foreign Institutional Investor (“RQFII”) scheme and / or Stock Connect programmes which may entail additional clearing and settlement, regulatory, operational, counterparty and liquidity risk.
  • For distributing share classes, some Funds may pay out dividend distributions out of capital. Where distributions are paid out of capital, this amounts to a return or withdrawal of part of your original investment or capital gains attributable to that and may result in an immediate decrease in the net asset value of shares.
  • Some Funds’ investments maybe concentrated in one region / one country / one sector / around one theme and therefore the value of the Fund may be more volatile and may be subject to concentration risk.
  • The risk exists that the quantitative techniques used by some Funds may not work and the Funds’ value may be adversely affected.
  • In addition to investment, market, liquidity, counterparty, securities lending, (reverse) repurchase agreements and foreign currency risk, some Funds are subject to risk associated with fixed income investments like credit risk, interest rate risk, convertible bonds risk, ABS risk and the risk of investments in non-investment grade or unrated securities and the risk of investments made in non-investment grade sovereign securities.
  • Some Funds can use derivatives extensively. Robeco Global Consumer Trends Equities can use derivatives for hedging and efficient portfolio management. Derivatives exposure may involve higher counterparty, liquidity and valuation risks. In adverse situations, the Funds may suffer significant losses (even a total loss of the Funds’ assets) from its derivative usage.
  • Robeco European High Yield Bonds is subject to Eurozone risk.
  • Investors may suffer substantial losses of their investments in the Funds. Investor should not invest in the Funds solely based on the information provided in this document and should read the offering documents (including potential risks involved) for details.

3. Local legal and sales restrictions
The Website is to be accessed by “professional investors” only (as defined in the Securities and Futures Ordinance (Cap.571) and/or the Securities and Futures (Professional Investors) Rules (Cap.571D) under the laws of Hong Kong). The Website is not directed at any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the publication or availability of the Website is prohibited. Persons in respect of whom such prohibitions apply or persons other than those specified above must not access this Website. Persons accessing the Website need to be aware that they are responsible themselves for the compliance with all local rules and regulations. By accessing this Website and any of its pages, you acknowledge your agreement with understanding of the following terms of use and legal information. If you do not agree to the terms and conditions below, do not access this Website or any pages thereof.

The information contained in the Website is being provided for information purposes.

Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.

4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.

5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.

6. Third party websites
This website includes material from third parties or links to websites maintained by third parties some of which is supplied by companies that are not affiliated to Robeco. Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage. Third party off-site pages or websites are provided for informational purposes only.

7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.

8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.

9. Privacy
Robeco guarantees that the data of persons accessing the Website will be treated confidentially in accordance with prevailing data protection regulations. Such data will not be made available to third parties without the approval of the persons accessing the Website, unless Robeco is legally obliged to do so. Please find more details in our Privacy and Cookie Policy.

10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong. 

Please click the “I agree” button if you have read and understood this page and agree to the Disclaimers above and the collection and use of your personal data by Robeco, for the purposes for which such data is collected and used as set out in the Privacy and Cookie Policy, including for the purpose of direct marketing of Robeco products or services. Otherwise, please click “I Disagree” to leave the website.

I Disagree