Reconciling Portfolio Diversification with a Shrinking Carbon Footprint

Net-zero-aligned portfolios (NZPs) are dynamically constructed so that their carbon footprint—defined as the market share of the carbon footprint of constituent stocks in the portfolio—is shrinking over time to achieve a net-zero (NZ) footprint by a target date (typically 2050). The basic aim of NZP construction is to reduce the carbon footprint over time in line with the prescribed, science-based Intergovernmental Panel on Climate Change (IPCC) decarbonization pathway for the global economy. Thus, the NZ-aligned decarbonization pathway prescribes a rate of reduction of the portfolio carbon footprint greater than or equal to the rate at which the IPCC estimated global carbon budget is shrinking.