Climate Investing

5A Framework for Achieving Net-Zero-Carbon Alpha Portfolios

5.1. Introduction

The world is on a trajectory towards anthropogenic climate change. Over the last several decades, a growing body of research has been pointing to the direct linkage between climate change and the amount of carbon put into the atmosphere through human activities (see, for example, Manabe and Wetherald (1967) and Keeling et al. (1976), etc.). The latest such research is the UN-backed IPCC Working Group I report, “Climate Change 2021: The Physical Science Basis”¹, which was approved by its 195 member countries and released in August 2021. In it, the 234 scientists involved from 66 countries did not mince words; climate change is real, and human activity is the primary source of global warming. Furthermore, according to the report, the Earth’s temperature is likely to breach the 1.5°C (2.7°F) pre-industrial threshold deemed environmentally catastrophic within 20 years, thus requiring drastic action to reduce greenhouse gas emissions. Fortunately, the scientists also concluded that there is still time to limit the most severe damages associated with climate change if immediate action is taken.

Climate change has potentially large and negative effects on global ecology, society and economy. Because of these effects, the high-order complexity and interaction involved in estimating future climate paths, and adaptive measures that will need to be taken, its exact impact is yet to be determined. However, a ...