University of Waterloo, Canada

Integrating systematic climate risk into asset pricing and portfolio allocation

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Abstract

There is consensus that the world is undergoing an energy transformation; however, the financial consequences they will incur receive less attention. This research examines financial sector resiliency in response to the systematic consequences associated with rapid decarbonization. The low-carbon transition will affect more than the fossil fuel industry, yet conventional financial theory, like the modern portfolio theory and asset pricing theory, are ill suited to address the systemic transition that will be required to decarbonize the entire economy. The original contribution of this research would be to design and test new financial methodologies to assess how climate consequences might influence financing decisions. A framework for pricing environmental externalities can build resilience in traditional portfolio allocation strategies and channel investments towards sustainable growth. Financial institutions and policy makers will also benefit from more comprehensive and rigorous models of integrating climate risks and opportunities for the financial sector.

Biography

Truzaar Dordi is a doctoral candidate at the University of Waterloo, working in the fields of sustainable finance, climate policy, and risk management. His research examines financial system stability in the face of rapid decarbonization policies, to enhance the role of the private sector in mobilizing green financing. Specifically, he is interested in the systemic consequences of decarbonization in asset pricing and portfolio allocation strategies. Truzaar is the recipient of the 2018 Energy Council of Canada Energy Policy Research Fellowship, awarded for his work on financial stability.