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Session 4.07: Using Net-Zero Alignment Strength for Sustainable Portfolio Choice
Time:
Tuesday, 26/Aug/2025:
2:00pm - 2:30pm
Location:Tosca Conference hall
Meeting hall “Tosca”, which can accommodate up to 60 people
Presentations
Using Net-Zero Alignment Strength for Sustainable Portfolio Choice
Prof. Budha Bhattacharya1,2, Prof. Maxime Kirgo2, Prof. Anatoly Schimdt3
1University College London; 2Lombard Odier Investment Management; 3Tandon School of Engineering, New York University
We offer a new metric, "net-zero alignment strength" (NZAS), which can be used by socially responsible investors for portfolio selection. NZAS is based on the current corporate GHG emission intensity (EI) and its reduction rate (ERR) and, hence, can be used for choosing among the companies with high EI and high ERR versus the companies with low EI and low ERR. We have incorporated NZAS into the mean-variance portfolio (MVP) framework, which yields simultaneous optimization upon high returns and NZAS, and low price volatility. The NZAS contribution to the MVP minimization function is controlled by the net-zero commitment parameter, which is investor’s choice. An example for a portfolio with 29 major constituents of the Energy sector illustrates an interplay between the company Sharpe ratios and NZAS, which determines the effects of the net-zero commitment on the major portfolio holdings. We suggest to use this framework for finding the best-in-class companies within the chosen equity sectors.
