Statistical Methods in Finance 2025

Sustainable Investment: Maintaining portfolio performance while reducing the carbon footprint

By: Rituparna Sen
Indian Statistical Institute, Bangalore

Amid the global crisis of climate change, urgent action is imperative. In this study, we develop two types of decarbonized indices, which render a dynamic hedging approach for passive investors. Focusing on long-term returns with minimal active trading and risk exposure, we create the decarbonized indices for NIFTY-50, a benchmark index for the Indian market. Proposed methodology relies on suitable optimization techniques to choose the portfolio weights that minimize the tracking error while significantly reducing carbon footprints. These indices are shown to perform better than existing benchmarks, especially during major climate events. They are likely to offer investors a buffer to adapt to climate policies and carbon pricing. In ongoing work, we use tail risk measures instead of variance to control the risk of the portfolio.