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  • Journal of Impact and ESG Investing

Decarbonization Factors

By: Alex Cheema-Fox, Bridget LaPerla, George Serafeim, David Turkington and Hui (Stacie) Wang
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Abstract

In the face of accelerating climate change, investors are making capital allocations seeking to decarbonize portfolios by reducing the carbon emissions of their holdings. To understand the performance of portfolio decarbonization strategies and investor behavior towards decarbonization, we construct decarbonization factors that go long low carbon intensity sectors, industries, or firms and short high carbon intensity. We consider several portfolio formation strategies and find strategies that lowered carbon emissions more aggressively performed better. Decarbonization factor returns are associated with contemporaneous institutional flows into the factors. Buying decarbonization factors when coincident flows are positive while selling when they are negative produces significantly positive alphas. Combining decarbonization factors that have positive contemporaneous flows would provide investors with significantly superior returns and continuous exposure to low carbon portfolios. The results are more pronounced in Europe relative to the United States. Our results suggest that institutional investor flows contain information about anticipated fundamentals related to climate change developments.

Keywords

ESG; Investment Management; Factor Investing; Investor Behavior; Climate Change; Environmental Sustainability; Investment; Management

Citation

Cheema-Fox, Alex, Bridget LaPerla, George Serafeim, David Turkington, and Hui (Stacie) Wang. "Decarbonization Factors." Journal of Impact and ESG Investing 2, no. 1 (Fall 2021): 47–73.
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About The Author

George Serafeim

Accounting and Management
→More Publications

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  • Organizational Climate Transition Risk Model By: George Serafeim and Benjamin Maletta
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  • Risks and Opportunities from the Transition to a Low Carbon Economy: A Business Analysis Framework By: George Serafeim
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