Building benchmarks portfolios with decreasing carbon footprints

In this paper, we build portfolios with a progressively falling carbon footprint, which passive investors could use as a new Paris-consistent (PC) benchmark while keeping their risk-adjusted returns at the same level as those of business-as-usual (BAU) benchmarks. We identify the worst polluters globally, exclude them from the portfolio, and re allocate the proceeds so as to keep sectoral and regional exposures similar to those of the business as usual (BAU) benchmark. This approach limits the divestment from corporates in emerging market economies that would result from implementing exclusions and reinvestment without the objective of preserving regional exposures. We show that reducing the carbon footprint of the portfolio by 64% in 10 years could be achieved by sequentially excluding up to 11% of the corporates, which together amount to less than 6% of the global market portfolio. While this reallocation keeps regional and sectoral exposures at a similar level to those of the BAU benchmark, it does not change the portfolio's risk-adjusted return. We define PC benchmark portfolios at the global level as well as for Emerging Countries, Europe, North America, and the Pacific.