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HomePaperOptimality in Sustainability Trade-Offs: Biodiversity & Climate

Optimality in Sustainability Trade-Offs: Biodiversity & Climate

1 February 2024
Authors: Eric Bouye (World Bank), Romain Deguest (World Bank), Emmanuel Jurczenko (EDHEC) and Jerome Teiletche (World Bank)
Presenter: Eric Bouye (World Bank)/Jerome Teiletche (World Bank)
Abstract:

We present a portfolio construction framework that allows investors to incorporate biodiversity risk in their investment decisions, alongside other sustainability objectives. Notably, our general approach can help investors tackle both climate and biodiversity objectives at once. By deriving analytical solutions to the tracking error minimization problem under multiple sustainability objectives, we investigate the trade-off between biodiversity and climate risk. We show over a 21-year backtesting exercise within a developed markets sovereign bond universe that investors can design portfolio strategies with enhanced biodiversity and climate content, without compromising on the risk and return profile versus a traditional market capitalization benchmark

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