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As investors increasingly seek to reduce the carbon exposure of their portfolios, measuring progress accurately has become just as important as setting climate objectives. Yet many widely used portfolio carbon metrics—including carbon footprint and carbon intensity—can improve simply because equity market valuations rise, even when underlying corporate emissions change relatively little.
In this paper, we examine how popular carbon metrics differ from financed emissions and explain why these measures capture different aspects of climate risk and portfolio decarbonization. While relative carbon metrics remain valuable for comparing portfolios and measuring benchmark-relative carbon exposure, they may overstate progress when used as time-series measures of decarbonization. Financed emissions, by contrast, provide a more direct connection to real-world emissions outcomes.
The paper also explores the implications for climate-aware portfolio construction, comparing fixed decarbonization pathways with benchmark-relative approaches and discussing how equity extension portfolios may allow investors to reduce net carbon exposure while preserving market exposure.
Download the full paper to learn how different carbon metrics can influence portfolio decarbonization decisions and why combining multiple measures may provide a more complete view of climate-related investment progress.
This document is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein.
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This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and AQR Capital Management, LLC (“AQR”) to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. This document is not to be reproduced or redistributed to any other person. The information set forth herein has been provided to you as secondary information and should not be the primary source for any investment or allocation decision. Past performance is not a guarantee of future performance. Diversification does not eliminate the risk of experiencing investment losses. This material is not research and should not be treated as research. This paper does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of AQR. The views expressed reflect the current views as of the date hereof and neither the author nor AQR undertakes to advise you of any changes in the views expressed herein. The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Charts and graphs provided herein are for illustrative purposes only. The information in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, neither AQR nor the author guarantees the accuracy, adequacy or completeness of such information. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. Diversification does not eliminate the risk of experiencing investment losses. The information in this paper may contain projections or other forward-looking statements regarding future events, targets, forecasts or expectations regarding the strategies described herein, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and may be significantly different from that shown here. The information in this document, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.
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Key arguments
- Carbon footprint and carbon intensity can improve simply because equity market valuations rise, even when corporate emissions change little.
- Relative carbon metrics are valuable for comparing portfolios but may overstate progress in time-series decarbonization.
- Financed emissions provide a more direct connection to real-world emissions outcomes.
- Combining multiple carbon metrics may provide a more complete view of climate-related investment progress.
- Equity extension portfolios may allow investors to reduce net carbon exposure while preserving market exposure.
Risks
- Relative carbon metrics may create a false sense of decarbonization progress.
- Relying on a single carbon metric may lead to suboptimal portfolio decisions.
- Fixed decarbonization pathways may not account for market valuation changes.