Infographic A New Approach to Hedging Climate Risks

As the risks associated with climate change rise, investors are increasingly looking for a way to hedge their stock holdings. Many want to minimize exposure to vulnerable industries while positioning their portfolios to benefit from a transition to a low-carbon economy. But which stocks should they buy and sell? A research team including Chicago Booth’s Julia Selgrad proposes an approach that taps into the wisdom of crowds—in this case, the collective insights of mutual fund managers.

While traditional hedging methods rely on historical prices, the new approach captures real-time trading reactions to evolving climate risks. The researchers examined nearly 2,500 unique funds whose managers were located in different parts of the United States. They analyzed the quantities of stocks that these managers bought and sold in response to local climate-related shocks between 2010 and 2019, and then used these patterns to assign positive or negative weights to industries in a portfolio.