Decarbonising equity portfolios

BY , ,   |  FRIDAY, 22 APR 2022    3:36PM

Asset managers can help investors promote the fight against climate change by decarbonising their portfolios. They can use, specifically, a dynamic 'glidepath' for reducing portfolio carbon emissions exposure that is both aligned with net zero goals and designed to minimise the impact on financial performance.

How can investors decarbonise their portfolios?

There are several available approaches, but they vary in the extent and robustness of their emissions reductions as well as in their impact on portfolio financial characteristics.

As a base case, a hypothetical active strategy is considered that maximises risk-adjusted returns using Acadian's proprietary bottom-up and top-down forecasting signals and portfolio construction methods. It does not incorporate any fossil fuel exclusions or decarbonisation tilts.

To align this hypothetical active strategy with climate science recommendations, a net zero glidepath solution is implemented. Specifically, the target is to reduce the portfolio's carbon intensity dynamically over time to meet two key criteria:

  • a 50% decrease in 2030 portfolio carbon exposure relative to 2020 benchmark levels
  • further reductions to levels that by 2050 would be aligned with net zero.
Weighted average carbon intensity (WACI) was chosen as the basis for this illustrative case study. For the glidepath specification two parameters are set:
  • an up-front WACI 'haircut', that is, an immediate reduction in portfolio WACI relative to the benchmark's 2020 level
  • a percentage decarbonisation rate that over subsequent years defines a smooth upper bound for WACI. The shaded area of Figure 1 shows net zero-compliant combinations of these two parameters, illustrating that there are many ways to achieve the required result.