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The carbon footprint of a passive equity portfolio can be reduced by 50% without sacrificing returns.
This is because as long as actions to mitigate climate change are pending, the low-carbon index should return the same amount as the benchmark index, but once carbon dioxide emissions are priced in the low-carbon index should start to outperform the benchmark. In our own research we have also found that the carbon footprint of equity portfolios can be reduced substantially with relatively little impact on performance.
However, we do see a number of open questions. For example, do carbon emissions represent an accurate proxy for climate risks, and might firms producing high emissions become underpriced when investors start to shun them (which could subsequently lead to a kind of “reputation risk premium” for investors to exploit)?