This article is a part of the NordSIP Insights – Handbook – “Investing Along the 17 Shades of SDGs”.
by State Street Global Advisors
Innovative, Effective, Ready
Achieving the ambitious goals outlined in the Paris Agreement requires that investors do more than simply reduce their portfolios’ carbon footprints. This understanding was one of the key drivers behind the development of our Sustainable Climate Strategy.
Since we introduced this customizable equity framework in late 2018, we’ve received a remarkable level of interest from pension funds, corporations, sovereign wealth funds and asset owners around the world who are committed to addressing climate risk through their portfolio management.
Our innovative and highly sophisticated framework establishes a new frontier in the effort to build climate change thematically into equity portfolios. The Strategy is defined by the following characteristics:
Mitigation + Adaptation
To target net carbon emission reductions in the portfolio, the Strategy reallocates capital away from companies with high current and embedded carbon emissions and brown revenues to companies that generate green revenues from low carbon technology.
In addition to this focus on mitigating the drivers of climate change, the Strategy also increases exposure to companies that are actively adapting to the actual or expected future effects of global warming and other environmental changes , helping investors to build more climate resilient portfolios in the process.
Alignment with Paris Agreement
The Strategy aligns with the ambitious goals of the Paris Agreement and prepares portfolios for the possible introduction of a carbon tax and other regulatory initiatives that could accompany the transition to a low-carbon economy.
Leverages Multiple Data Sources
Given the multifaceted objectives of the Strategy, our framework integrates data from leading providers: S&P Trucost (carbon emission intensity, fossil fuel reserves and brown revenues), FTSE Russell (green revenues) and ISS ESG (adaptation). The seleceted data helps isolate with precision the climate parameters we target .
Flexibility to Meet Client Objectives
We designed the Strategy framework so that it could be customized to meet each investor’s needs in terms of climate priorities, desired benchmark, tracking-error budget and any exclusions needed to meet other international norms or sustainability considerations.
The Next Wave, Now
The State Street Sustainable Climate Strategy is a long-only investment approach that uses a mitigation + adaptation methodology to build climate change thematically into equity portfolios.
Designed from the ground up to be flexible, the customizable framework allows us to create client portfolios that target reductions in current and future carbon emissions, increase exposure to green revenues and increase resiliency to the physical risks posed by climate change.
The Strategy is aligned with the most ambitious goals stemming from the landmark 2015 Paris Agreement — including limiting climate change to the 2° Celsius warming scenario over the 21st century.
It’s designed for investors who wish prepare their portfolios for the transition to a low-carbon economy, in a scalable and risk-aware way. It’s available now to meet those needs.
Steps to Sustainability: Questions to Consider
What are your climate-related investment objectives?
Reduce your portfolio’s carbon emissions? Include fossil fuel reserves and brown revenues? Or incorporate longer timeframes into the risk analysis and seek to add more resiliency to their portfolios? Your objectives play a vital role in determining which approach is most appropriate.
What is your total portfolio exposure to climate risk?
With our advanced work in blending multiple sources of best-in-class data and advanced analytics tools, we can help clients assess their exposure to climate risk across all their holdings.
What is the range of available solutions?
An important early step in our conversations is explaining the differences between an exclusionary approach at one end of the spectrum and a mitigation + adaptation approach (Sustainable Climate Strategy) at the other and this across all other asset classes.
What specific constraints and parameters need to be incorporated into the framework?
We start by identifying which benchmark the objectives should be applied to. We’ll also identify constraints the investor may have in terms of tracking error budget, geographic or sector concentration, and specific sustainability exclusionary screens.
How would potential solutions affect the risk/return profile of your portfolio?
Once these parameters have been designed and incorporated into the framework, we then back-test the strategy to show how an optimized portfolio would have performed. This is a critical step because it allows investors to see the actual impact on risk/return, tracking error and concentration for various levels of carbon reduction and other climate goals. We can show how implementing the strategy would affect the risk/return profile of the client’s entire portfolio. Having this information and seeing hard numbers about the investment considerations allows investors to determine where they want to be on what we call the efficient climate frontier.
Learn how SSGA’s ESG strategies could help you meet the climate change challenge and more. Please visit ssga.com/climate for case studies and further information
Featured image from Pixabay
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