DWS: How To Make Portfolio Climate Risks Transparent


The following is a media advisory from DWS:

How to make the climate risks in a portfolio transparent

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Climate change is not an indeterminate, world-wide phenomenon that will only become relevant for companies in the future. Even now, extreme weather conditions can lead to high costs along the production and supply chain and can threaten profits. Leading electronics groups, automobile manufacturers and mining companies are already feeling the effects. Climate-related risk analyses can help to minimise risks of this nature for individual companies, their suppliers, production facilities and competitors.

Climate change has real consequences for companies, so that taking account of these risks will become inevitable when making investment decisions. For instance, investors at portfolio level want to know where the CO­ risks are in their investments. Although efforts to standardise the recording of climate risks are still at an early stage, new concepts are progressively being introduced to allow the climate risks in a portfolio to be presented transparently to investors. For instance, it is possible to measure the CO2 emissions produced per million US$ invested in the shares concerned. This “normalized carbon footprint” is an important yardstick, allowing comparison with a benchmark, between several portfolios and over time, regardless of the size of the portfolio. This figure lets investors to ensure their investments are not adding to worldwide climate risk. Investors can implement this strategy in their portfolios by using various index concepts.

A good example of this is the MSCI Europe ESG LCL ex Tobacco Index (ESG-Index). This demonstrates how the CO2 emissions of an index can be determined – both in comparison with the underlying index, the MSCI Europe, and over time. The “normalized carbon footprint” of the ESG index has fallen significantly: it’s dropped from 106.0 to 62.4 tonnes since 2010, while the MSCI Europe saw a much more moderate decline, from 181.7 to 164.4 tonnes. Another key figure is the “CO2 intensity”. This is the ratio of the total CO2 emissions by a portfolio company and its total turnover. This indicator shows investors how much CO2 emissions per US$ of turnover are caused by their investment, enabling the comparison of emissions between individual companies of different sizes and sectors. Companies with a high CO2 intensity are weighted lower in the ESG index, in order to make a contribution to minimising climate risks.

It will probably be some time before standardised methods of assessing the climate risk in investment portfolios become more widely accepted and available. In the meantime, investors who want to express a positive influence are concentration can use ETFs. DWS’s ESG Xtrackers ETFs favour highly rated companies in terms of ESG (environmental, social and corporate governance) and exclude companies with very high CO2 emissions and the production of fossil fuels.

For further information please contact:

Narva Jacob Olofsson

[email protected]

Image: (c) Lightspring-shutterstock

Partner message

In the midst of a global pandemic, Apple announced one of the corporate world’s most ambitious environmental blueprints – to reduce the climate impact of every Apple device to net zero by 2030. The plan involves cutting 75 per cent of the company’s existing carbon footprint, not only for its own business but also across the manufacturing supply chain and product life cycle.

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