Hedging Against Climate Change Rewards Investors [ENG]

Effective risk management is crucial in assessing portfolio characteristics, and Beta, or market risk, is a well-established concept in the industry. Identifying the primary sources of risk in stock or fund selection is challenging, and there is a concern about overlooking important risk contributors. As the environment rapidly evolves, risks are likely shifting to new horizons. JP Morgan Asset Management emphasises the importance of investors being highly vigilant about risk-return drivers.

This specific research utilises a survivor bias-free mutual fund database spanning a 10-year period, starting from 2008. The objective is to conduct a risk factor analysis using the Crimson Hexagon Negative Sentiment Climate Changes News Index. This index aims to measure the intensity of negative discussions about climate change from over 1000 news sources. By backtesting monthly climate news Beta-sorted portfolios, the findings reveal that high climate news beta funds, or funds well-hedged against climate change, consistently outperformed with an average monthly return of 0.21% from July 2010 to June 2018. The study highlights that these funds are comprised of portfolios with a tilt towards stocks having high climate news beta.

Climate change and the risks associated to this unprecedent scenario seem to embed new opportunities for investors. Even though it is still difficult to quantify and capture, it is surely a subject to consider nowadays when building or adjusting a portfolio.

Benoit Lahaye
Junior Investment Analyst

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