A0297
Title: Responsible investing under ambiguity induced by climate risk
Authors: Monica Billio - University of Venice (Italy) [presenting]
Massimo Guidolin - Universita' Commerciale Luigi Bocconi - BAFFI CAREFIN (Italy)
Francesco Rocciolo - Imperial College London (United Kingdom)
Abstract: The aim is to propose a theory of responsible investing under conditions of ambiguity induced by climate risk by studying the portfolio allocation problem solved a smoothly ambiguity averse representative agent. Within this setting, we find that the ambiguity risk premium is a strictly decreasing function of the environmental scores of the assets. Ambiguity-averse investors behave as environmentally motivated agents who allocate their wealth according to a mean-variance-ambiguity efficient frontier and their attitude towards risk and ambiguity. The agents rationally choose green portfolios in order to diminish their exposition towards ambiguity and maximize their ambiguity Sharpe ratio. Our theoretical predictions are consistent with the empirical literature on the rewards-to-risks trade-off of responsible investment.
