Title: Hedging financial and environmental risk in portfolios: constructing and evaluating eco-funds

Authors: Kan Nakayashiki; Wei Zang; Satoshi Kumagai

Addresses: Graduate School of Science and Engineering, Aoyama Gakuin University, Kanagawa, Japan ' College of Science and Engineering, Aoyama Gakuin University, Kanagawa, Japan ' College of Science and Engineering, Aoyama Gakuin University, Kanagawa, Japan

Abstract: Reducing their environmental load has recently become a key concern to firms. Many financial products that invest in companies with a strong environmental consciousness, such as the Nikko Eco-fund, have been released. However, choosing an ecological fund based on an interview or questionnaire is a qualitative process, as an ecological fund does not reflect a firm's environmental performance, nor reduces environmental risk. This study calculates an environmental beta value (environmental risk) using emissions data on environmental load material, applying eco performance and economic screening. We, then, decide on investment brands and ratios using the environmental beta value and efficient frontier. Finally, we propose an environmental portfolio that reduces environmental and financial risks. This methodology enables to assess environmental risk in a quantitative manner. Two brands of company that simultaneously reduce environmental and financial risks are identified.

Keywords: environmental risks; beta-value; portfolio management; eco-funds; economic screening; eco performance screening.

DOI: 10.1504/AJMSA.2017.083509

Asian Journal of Management Science and Applications, 2017 Vol.3 No.1, pp.38 - 49

Received: 13 May 2016
Accepted: 16 Nov 2016

Published online: 08 Apr 2017 *

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