Duration-Weighted Carbon Footprint Metrics and Carbon Risk Factor for Credit Portfolios

Abstract: Current standard carbon footprint metrics attribute responsibility for a firm’s green house gas (GHG) emitting activities equally between an entity’s equity and debt. This study introduces a set of novel duration-weighted metrics which take into consideration the length of financing provided. These measure show promise for reporting footprints of debt portfolios, but further study of methodological robustness should be performed before they can be adopted widely. The measures are also attractive from a risk perspective as they are linearly dependent on duration and therefore are sensitive to yields. A factor portfolio is constructed using the new carbon intensity measure, and corporate yields are studied in a linear factor model. Other factors included derive from Nelson-Siegel parameterizations of US Treasury rates and the USD swap spread curve. Following the Fama-MacBeth procedure, the carbon factor is found not to persist over the 10-year period.