Portfolio allocation and optimization with carbon offsets: Is it worth the while?

We explore whether the integration of carbon offsets into investment portfolios improves performance. Using compliance and voluntary carbon offsets from around the world, our results show that investment strategies that include such offsets broadly achieve higher Sharpe Ratios than the diversified benchmark, with the long-short strategy performing best. We find that compliance and voluntary carbon offsets are mostly net volatility and return spillover recipients, consistent from a macro-perspective. These results, which are documented for the first time in the literature provide new empirical evidence on integrating carbon offsets into portfolios and may attract new financial and retail investors to carbon markets.