Green Parity and the Decarbonization of Corporate Bond Portfolios

Abstract

This study explores the incorporation of climate change into fixed income investment. We investigate the cost of decarbonization and the selection of Sustainable Investment strategies in portfolio construction, providing a comprehensive analytical framework. Employing a passive management style and through empirical analysis, we assess the tradeoff between decarbonization and the associated cost in terms of benchmark deviation for a corporate bond portfolio. We also propose an innovative strategy called “Green Parity,” which helps to improve traditional approaches to decarbonization. Our results challenge the common belief that pursuing decarbonization targets inevitably compromises risk-return outcomes.