Climate Risk Integration in Portfolio Construction: A Systematic Literature Review, Conceptual Framework, and Future Research Agenda

<title>Abstract</title> <p> Climate-related financial risks have become an increasingly important consideration in portfolio construction because climate change may significantly influence asset valuation, investment performance, and long-term financial stability. As investors, financial institutions, and regulators place greater emphasis on sustainable finance, climate-aware investment strategies have evolved from traditional environmental screening towards comprehensive approaches integrating climate-related financial risks into portfolio optimisation and investment decision-making. Despite the rapid growth of research in this area, the literature remains fragmented with respect to theoretical perspectives, climate-risk measurement, portfolio construction methodologies, and governance frameworks. This study addresses this gap through a systematic literature review (SLR) based on the <bold>PRISMA 2020</bold> framework to synthesise current knowledge on climate risk integration in portfolio construction <bold>(Page et al., 2021; Snyder, 2019).</bold> Nineteen peer-reviewed studies published between 2015 and 2024 were identified through a structured search and screening process. The review analyses the theoretical foundations, climate-risk measurement approaches, portfolio construction strategies, governance mechanisms, and practical applications of climate-aware investing. The findings demonstrate that transition risk remains the dominant focus of existing research, whereas physical climate risk receives comparatively limited attention. Carbon emissions, transition-risk indicators, climate-related disclosures, and ESG information are the most frequently used measures for integrating climate risk into investment decision-making. Based on the synthesis, this study develops an integrated conceptual framework linking climate-risk drivers, measurement approaches, portfolio construction strategies, governance mechanisms, and portfolio outcomes. The review further identifies key research gaps and proposes a future research agenda to support the continued development of climate-aware portfolio management. The findings contribute to the growing literature on climate finance by providing practical insights for researchers, institutional investors, asset managers, financial institutions, and policymakers seeking to strengthen climate risk integration within portfolio construction. </p>