CLIMATE RISK
Assessing carbon impact: understanding and managing the carbon risk of your investments
AMINDIS INSIGHTS
Estimated reading time: 6 min.
Assess and analyze the carbon risk embedded in your portfolio to support the transition to a low-carbon economy
Climate change is an urgent global challenge requiring a transition towards greener investments and low-carbon portfolio strategies. With increasing regulations and carbon pricing mechanisms, investors need tools to assess and manage the carbon risk in their portfolios effectively.
This article covers:
UNDERSTANDING THE TRANSITION RISK OF YOUR INVESTMENTS
Every company emitting greenhouse gases (GHG) carries a financial liability linked to carbon certificates, reflecting the cost of carbon emissions. This cost represents a part of the transition risk—the risk tied to the shift towards a low-carbon economy.
AMINDIS’s R&D department has developed a methodology to help investment managers quantify this risk and identify holdings most exposed to carbon transition challenges.
IMPROVING YOUR PORTFOLIO STRATEGY THROUGH CARBON RISK ANALYSIS
Predicting precisely how companies will act to reduce their emissions is complex. However, focusing on low-emitting securities and measuring the impact of over- or underweighting carbon-intensive sectors allows investors to better understand medium- and long-term transition risks.
This approach supports multiple investment management activities:
- Ex-ante risk assessment
- Portfolio optimization via reallocation to lower transition risk securities
- Stress testing portfolio resilience
- Client and regulatory reporting
- Back-testing carbon reduction trajectories
CARBON PERFORMANCE ATTRIBUTION: MEASURING THE IMPACT OF CARBON ON RETURNS
As investors incorporate climate indicators into their portfolio construction, linking these indicators directly to carbon gains enables a precise measurement of the impact of carbon reduction strategies on performance.
The methodology calculates the carbon cost and highlights how carbon emissions influence portfolio returns, supporting more transparent and informed investment decisions.
HIGHLIGHT ON CARBON FOOTPRINT
Integrating carbon footprint considerations provides several benefits, aligned with the New I.R.R. (Impact, Risk, Return) framework that measures interactions between sustainability, financial return, and risk.
Key advantages include:
Requires limited data for implementation
Enables immediate issuer comparison within sectors
Clarifies correlation between portfolio performance and sustainability positioning
Assesses company business model quality by factoring out carbon cost
Highlights management quality regarding carbon objectives in investor communications
Allows carbon cost adaptation based on company- or sector-specific factors
A HOLISTIC APPROACH TO CARBON RISK MANAGEMENT
Successfully managing carbon risk requires integrating impact, risk, and return considerations across all business functions. A comprehensive, data-driven methodology empowers investors to make premium investment decisions aligned with climate objectives and regulatory demands.
EXPLORE MORE ARTICLES
COMMON QUESTIONS ABOUT THIS TOPIC
Title
What is climate risk in an investment portfolio?
Climate risk is the potential financial loss a portfolio faces from both transition risk (costs tied to carbon emissions, regulations, market shifts) and physical risk (extreme weather, environmental damage) as the economy moves toward a low-carbon future.
Title
How do you measure carbon transition risk for individual holdings?
By estimating the cost of future carbon emissions for a company (via its carbon footprint, carbon intensity, emissions reduction trajectory) and discounting that cost into potential negative returns for the investor.
Title
Why integrate carbon performance attribution into portfolio strategy?
Because carbon performance attribution links carbon emissions with portfolio returns, helping investors understand how over- or underweighting high-emission sectors affects performance and risk, and thus supports reallocation decisions.
Title
How can asset owners reduce climate (carbon) risk in portfolios?
By tilting toward lower-emitting securities, applying stress-testing scenarios for carbon cost impacts, reallocating out of high-carbon sectors, and back-testing portfolios against decarbonization trajectories.
Title
What are the benefits of a holistic carbon risk management approach?
A data-driven carbon risk methodology enables immediate issuer comparison, links sustainability metrics with financial return and risk (“New IRR” framework), enhances transparency, and aligns portfolios with regulatory and client mandates toward a low-carbon economy.