Race to net zero
Seeing the world in an investment portfolio
To help investors decarbonise their portfolios while mitigating climate risks in the real economy, we explore the options available, the related risk-return advantages, and how to navigate the challenges along the way.
More investors are committing to aligning their investment decision-making with the goals of the Paris Agreement to keep global average temperature rises well below 2.0°C and aiming for 1.5°C. In our ‘Race to net zero’ series, we share our views around climate-aware investing during various stages of the journey to decarbonise investment portfolios.
From the top down: Capital market assumptions in the climate crisis
Climate change can influence key macroeconomic and financial variables, affecting capital market assumptions and returns. We model the effects of these variables under six climate scenarios and analysed them across regions and asset classes.
Tracking net zero progress: Too little, not too late
Energy security and climate urgency were brought into sharp focus recently with record temperatures, a war-induced energy crisis and the related macroeconomic fallout. We examine the latest developments in corporate action, technology, and policy.
- Establish baselines (e.g. portfolio carbon footprint)
- Determine areas of portfolio most vulnerable to climate-related risks (transition vs. physical)
- Develop strategic asset allocation views based on capital market assumptions
- Prioritise asset classes or portfolios for decarbonisation (e.g. equities)
Race to net zero: Setting climate-aware ambitions
Before embarking on a decarbonisation strategy, investors need to determine a carbon emissions baseline, define their views of climate risks and opportunities, and harmonise those views with risk-return objectives.
Implementing a portfolio decarbonisation pathway
Once decarbonisation targets are set, how can investors implement their climate goals while managing other financial and non-financial responsibilities? In this guide, we explore the options to turn ambition into action.
Decarbonising a fixed income portfolio
Fixed income offers investors more opportunities to address the climate crisis that can complement the progress they are making in equities. In fixed come, however, they need to consider the risk-return complexity characterised by the asset class.
Decarbonising a direct real estate portfolio
Perhaps more than any other asset class, real estate stands at the crossroads between climate physical and transition risks. That should make the sector a priority for investors to address climate change.
Decarbonising a private credit portfolio
It is just as crucial to decarbonise investments in private markets as it is in public markets to align financial goals with environmental responsibility. What are some of the practicalities to consider?
- Measure and verify KPIs
- Disclose results and perceived gaps in meeting targets
- Determine next steps to close those gaps
- Adjust targets based on changing best practices, data availability, regulations and technology
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