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Decarbonize your portfolio

Low-carbon, high return. How to decarbonize your portfolio in 4 steps.

Investors are addressing climate risks and opportunities within their portfolios. How can you ensure that your investments are aligned to a low-carbon future? Our report, The decarbonizing portfolio, tells investors how to do just that.

As the world begins its inevitable shift to a low-carbon economy, investors are taking a closer look at their portfolios in the aim of mitigating their climate-related risk. But climate-proofing a portfolio is also an opportunity to invest in the businesses that are actively contributing to decarbonizing the economy. With sustainable and impact investing strategies now spread across the asset classes, investors have good reason to rethink their portfolios and prepare for the future.

Investing for a low carbon future

Here’s our approach to transition your portfolio in 4 steps to align with a low-carbon future.

Step 1 - Assessing the portfolio

First and foremost, investors will need to understand the carbon exposure of their portfolio and to what degree the underlying companies are aligned with the goal of keeping warming within1.5°C or 2°C. The carbon footprint of a portfolio is the weighted average carbon emissions of the underlying companies in the portfolio and can be compared with a reference benchmark to give a rough estimate of the impact of the investments.

However, a company’s carbon emissions are only part of the story. As the economy transitions to a low carbon economy, some sectors, such as the supply chains for wind turbine and solar PV manufacture, generate significant emissions at the company level, yet are likely to benefit considerably from the climate transition. Therefore, it is also important to measure carbon transition preparedness to give a full picture.

Step 2 - Reducing a portfolio’s carbon intensity

Once an investor has assessed the portfolio for carbon exposure and identified companies that may face significant risks from a climate transition, they can start swapping out some of the laggard companies in exchange for lower-emitting or more climate-aligned securities. There are now low-carbon substitutes in almost all asset classes in a typical portfolio that can dramatically lower the carbon footprint while retaining a similar risk/return profile.

Step 3 - Integrating climate risk into investment

The climate transition will happen at varying paces. Different jurisdictions will increase the price of carbon at different times and rates. In addition, the effects of climate change and carbon prices will affect every company based on the particular circumstances of their set–up and business model: Therefore, climate risk assessment will need to be built into fundamental analysis of investments.

Step 4 - Shifting into companies providing climate

Simply shifting out of high emitters into climate-aligned companies, does not solve climate change. Investors need to direct capital towards solutions as well. However, companies and funds focused on those solutions are often at the higher-risk, higher-conviction end of the spectrum, and tend to be concentrated in a smaller number of sectors.

Currently they are often placed in a “satellite” allocation as opposed to the “core” portfolio. But as climate solutions become more mainstream and these companies grow in size and maturity, they will increasingly become part of investors’ core portfolios.

Investors should continue avoiding risks and seeking opportunities relating to the disruption that comes with transitioning to a low-carbon economy. They can also be a step ahead in helping to drive this transition, as their capital can speed up the transformation of industries and sectors, and support regulatory and consumer trends. Take tomorrow.

The decarbonizing portfolio

Our report, The decarbonizing portfolio, explains in depth why investor portfolios need to be ready for the inevitable shift to a low-carbon economy. Our research outlines various types of sustainable and impact investing approaches that can help investors prepare. It describes new methodologies to assess risk and opportunity from climate change, and discover steps investors can take to decarbonize their portfolio now to reap the benefits in the long run.

Investments can go down as well as up and your capital may be at risk

To find out more on how to take tomorrow in a low-carbon world

Awards and related information

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Best Private Bank for Entrepreneurs

Best Private Bank for Entrepreneurs

Excellence in Leadership in Western Europe

Excellence in Leadership in Western Europe

Footnotes

For more information about the Awards, please visit PWM/The Banker Global Private Banking Awards and Euromoney Awards for Excellence 2020

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