Incorporating systematic carbon risk into global business portfolios for carbon-intensive industries

Ick Jin; Ick Jin

doi:10.3934/DSFE.2026015

Data Science in Finance and Economics

2026, Volume 6, Issue 3: 425-451. doi: 10.3934/DSFE.2026015

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Research article

Incorporating systematic carbon risk into global business portfolios for carbon-intensive industries

Ick Jin ^, ,

Fiscal Planning, Office of the President, 1 Cheongwadae-ro, Jongno-gu, Seoul, 03048 Korea

Received: 17 March 2026 Revised: 16 April 2026 Accepted: 17 April 2026 Published: 03 August 2026
JEL Codes: C15, G11, G12, G13, G22, G33, H61, H80

In the contemporary economy, carbon-intensive multinational corporations must function as portfolio managers, balancing growth against non-diversifiable systematic carbon risk driven by globally synchronized policies like the Paris Agreement. Analyzing 181 jurisdictions from 1985–2024, I employed a double-index model to isolate carbon beta (a distinct climate transition sensitivity) from traditional market risk through hierarchical grouping and rolling window optimization. The findings demonstrated that risk-adjusted returns could be significantly enhanced by concentrating capital (half of the total portfolio weight) within the three sorted groups exhibiting the lowest systematic risk. Notably, the 2015 Paris Agreement acted as a structural pivot, shifting optimal strategies toward defensive concentration in low-carbon regions to mitigate regulatory volatility. Sensitivity analysis further revealed that the opportunity cost of ignoring carbon risk was highest during periods of low carbon-index volatility, providing a robust, analytically grounded framework for constructing resilient business portfolios in a carbon-constrained world.
- international business portfolios,
- growth potential,
- strategic carbon exposure,
- double index model,
- simple and extended criteria,
- risk-adjusted return
Citation: Ick Jin. Incorporating systematic carbon risk into global business portfolios for carbon-intensive industries[J]. Data Science in Finance and Economics, 2026, 6(3): 425-451. doi: 10.3934/DSFE.2026015

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Abstract

In the contemporary economy, carbon-intensive multinational corporations must function as portfolio managers, balancing growth against non-diversifiable systematic carbon risk driven by globally synchronized policies like the Paris Agreement. Analyzing 181 jurisdictions from 1985–2024, I employed a double-index model to isolate carbon beta (a distinct climate transition sensitivity) from traditional market risk through hierarchical grouping and rolling window optimization. The findings demonstrated that risk-adjusted returns could be significantly enhanced by concentrating capital (half of the total portfolio weight) within the three sorted groups exhibiting the lowest systematic risk. Notably, the 2015 Paris Agreement acted as a structural pivot, shifting optimal strategies toward defensive concentration in low-carbon regions to mitigate regulatory volatility. Sensitivity analysis further revealed that the opportunity cost of ignoring carbon risk was highest during periods of low carbon-index volatility, providing a robust, analytically grounded framework for constructing resilient business portfolios in a carbon-constrained world.

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