Live simultaneous interpretation in French.
The paper discusses a simple dynamic investment strategy that allows long-term passive investors to hedge climate risk without sacrificing financial returns. The hedging strategy goes beyond a simple divestment of high carbon footprint or stranded assets stocks. This is just the first step. The second step is to optimize the composition of the low carbon portfolio so as to minimize the tracking error with the reference benchmark index. Tracking error can be almost completely eliminated even for a low carbon index that has a more than 50 % smaller carbon footprint. The low carbon portfolios in existence that have been constructed in this way have so far matched or outperformed their benchmark. By investing in such a decarbonized index investors are holding, in effect, a "free option on carbon": as long as the introduction of significant limits onCO2 emissions is postponed they are essentially able to obtain the same returns as on a benchmark index, but the day whenCO2 emissions are priced the low carbon index will outperform the benchmark and the option will be in the money.
