PT - JOURNAL ARTICLE AU - Bill Hao AU - Aye M. Soe AU - Kelly Tang TI - Carbon Risk Integration with Factors AID - 10.3905/jii.2018.1.061 DP - 2018 Aug 31 TA - The Journal of Index Investing PG - 53--65 VI - 9 IP - 2 4099 - https://pm-research.com/content/9/2/53.short 4100 - https://pm-research.com/content/9/2/53.full AB - Integration of carbon risks into the investment process requires careful analysis of risk–return characteristics and factor exposures of resulting carbon-efficient portfolios. In this article, we propose a stylized framework to integrate traditional style factors with carbon-efficient portfolios for both U.S and developed Europe markets. The results show that although carbon-efficient factor portfolios do achieve the objective of lowering carbon intensity, they generally have lower risk-adjusted returns than the pure factor portfolios. In addition, carbon-efficient factor portfolios have lower exposure to the targeted factors, and the reductions in factor exposure are statistically significant.TOPICS: Analysis of individual factors/risk premia, ESG investing, developed