Chapter 10: Avoiding the Tragedy of the Horizon: Portfolio Design for Climate Change-Related Risk Management and the Low-Carbon Energy Transition

Jennifer Bender, Todd Arthur Bridges, Kushal Shah, and Alison Weiner


This chapter discusses recent developments in how institutional investors are approaching the integration of climate change considerations into their equity portfolios. In recent years, increasing evidence of climate change impacts combined with emerging GHG regulatory requirements has generated rapid innovation in investing with an eye toward carbon exposure. No longer confined to small satellite allocations in their portfolios, investors are seeking integration methods at the total portfolio. We discuss a range of portfolio design approaches in this chapter from simple screening-based approaches, which have been prevalent within ESG investing for some years, to newer optimization-based portfolio construction techniques embedding multiple climate change metrics and criteria.