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Beyond Divestment: Using Low Carbon Indexes

Winner of the 2015 IRRC Institute Investor Research Award for best practitioner paper.

Approaches based on divesting certain sectors effectively can help asset owners communicate their concerns about the risks of climate change to stakeholders. However, they ignore short-term benchmark risk. Further, a focus on divesting reserves disregards fixed assets that are at risk of losing value because they depend on burning fossil fuel reserves. This paper provides a framework for evaluating ways to reduce two dimensions of carbon exposure - current carbon emissions and potential future emissions embedded in fossil fuel reserves - and explores new and more financially viable ways of managing carbon risk.