Risk Measures for the Climate Transition Age: Why Symmetric Risk Budgets are unlikely to mitigate two-dimensionally asymmetric Climate Change risks
Abstract
The most widely used investment risk measures - variance, standard deviation, and tracking error - treat upside deviations as equally undesirable as downside losses. In stable markets with assumed symmetric return distributions, this simplification is potentially harmless. In the climate transition age, it is not. Climate risk is two-dimensionally asymmetric, across assets and over time. Both dimensions are negatively skewed against investors. Hence, climate transition investment strategies deliberately deviate from benchmarks that reflect an insufficiently decarbonising global economy. When fiduciaries enforce tracking error budgets that penalise outperformance just as heavily as underperformance, they inadvertently constrain exactly the portfolio return opportunities that climate-aware investing seeks. We argue that replacing symmetric deviation-based risk measures with their downside-only counterparts - semi-variance, standard risk and trailing error - resolves this conflict without sacrificing any fiduciary discipline. The distinction is not merely semantic: as the gap between climate transition trajectories and market benchmarks widens over the coming decades, symmetric risk budgets will become binding constraints on transition strategies well before actual investment risk warrants it. We propose specific changes to mandate design that would allow institutional investors to pursue climate transition opportunities within genuinely risk-aware (rather than deviation-averse) frameworks.
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BibTeX
@misc{dijkstra2026risk,
title = {{Risk Measures for the Climate Transition Age: Why Symmetric Risk Budgets are unlikely to mitigate two-dimensionally asymmetric Climate Change risks}},
author = {Lars Dijkstra and Andreas G. F. Hoepner and Fabiola I. Schneider and Agnieszka Słomka-Gołębiowska},
howpublished = {arXiv},
year = {2026},
month = oct,
doi = {10.48550/arxiv.2610.18387},
eprint = {2610.18387},
archivePrefix = {arXiv},
url = {https://arxiv.org/abs/2610.18387},
note = {CC BY-NC-SA 4.0},
}
RIS
TY - UNPB
TI - Risk Measures for the Climate Transition Age: Why Symmetric Risk Budgets are unlikely to mitigate two-dimensionally asymmetric Climate Change risks
AU - Lars Dijkstra
AU - Andreas G. F. Hoepner
AU - Fabiola I. Schneider
AU - Agnieszka Słomka-Gołębiowska
PY - 2026
DA - 2026/10/13
PB - arXiv
DO - 10.48550/arxiv.2610.18387
UR - https://arxiv.org/abs/2610.18387
AB - The most widely used investment risk measures - variance, standard deviation, and tracking error - treat upside deviations as equally undesirable as downside losses. In stable markets with assumed symmetric return distributions, this simplification is potentially harmless. In the climate transition age, it is not. Climate risk is two-dimensionally asymmetric, across assets and over time. Both dimensions are negatively skewed against investors. Hence, climate transition investment strategies deliberately deviate from benchmarks that reflect an insufficiently decarbonising global economy. When fiduciaries enforce tracking error budgets that penalise outperformance just as heavily as underperformance, they inadvertently constrain exactly the portfolio return opportunities that climate-aware investing seeks. We argue that replacing symmetric deviation-based risk measures with their downside-only counterparts - semi-variance, standard risk and trailing error - resolves this conflict without sacrificing any fiduciary discipline. The distinction is not merely semantic: as the gap between climate transition trajectories and market benchmarks widens over the coming decades, symmetric risk budgets will become binding constraints on transition strategies well before actual investment risk warrants it. We propose specific changes to mandate design that would allow institutional investors to pursue climate transition opportunities within genuinely risk-aware (rather than deviation-averse) frameworks.
ER -