Low volatility investors often seek improved returns and risk reduction relative to the benchmark. However, one risk that often goes unaccounted for in these strategies is climate change risk. Without other controls in place, low volatility strategies can take significant overweight positions to the Utilities sector, which is far and away the most carbon intensive sector. But does this mean that these two concepts are not compatible? Is it the case that, investors can manage volatility or climate change risk, but not both? We do not think this is the case.
In this paper, we will review some important dynamics related to low volatility investing, including the intersection of low volatility and low carbon. One important takeaway from this intersection analysis is that not all low volatility portfolios are amenable to low carbon integration. Last, we provide an example of a low volatility portfolio whose initial risk controls make it highly suitable to successfully integrate a carbon footprint reduction without sacrificing other investment objectives.
Download the paper here.
