Manuela Sperandeo | Managing Director | EMEA | Head | Smart Beta, Sustainable and Thematic ETFs | BlackRock Asset Management | mail me |
Carolyn Weinberg | Global Head | Product for iShares and Index Investments | BlackRock Asset Management | mail me |
Representing 75-80% of a portfolio, the core public equity and debt investments can drive the largest impact on positioning the whole portfolio on a path to meet whole portfolio climate objectives.
Decarbonisation on a scale sufficient to reach global emissions-reduction targets will transform each sector of the global economy.
Such wholesale economic transformation presents opportunities and risks across all asset classes in both public and private markets. Should climate-related variables affect economic growth, historical risk premia for entire asset classes may change: a shift that will challenge all types of investors. Such challenges will be particularly acute at the core of investor portfolios – allocations that are generally long-term in nature and account for a majority of portfolio assets.
Advances in climate data and analytics
Many questions we hear from our clients involve ‘how’: how should I think about overhauling or replacing my anchor, ‘core’ positions, and how can I communicate my decision-making to my clients?
Fortunately, advances in climate data and analytics have made it possible to move away from the binary mindset of ‘active versus index’ when it comes to pursuing the specific needs of different investors.
The breadth and depth of our capabilities in climate analytics, risk management and research allow for the integration of alpha-seeking strategies alongside index-tracking (or index-like) strategies to address the transition to a low-carbon economy. This approach is consistent with the results of a poll taken during our Global Summit earlier this summer: 56% of respondents consider both ‘active’ and ‘index’ appropriate core positions for capturing the opportunities and navigating the risks of the transition.
As always, the ‘right’ core implementation for the climate transition is the one that meets the investor’s objective. Consider an investor who wishes to move away from fossil fuels and target companies that operate in a carbon-efficient way.
Incorporating climate objectives
A rules-based broad market exposure or index-fund building block can incorporate climate objectives by minimising exposure to fossil-fuel producers and over-weighting companies with credible emission-reduction targets.
In this case, an index-based strategy would be likely to deliver returns closer to an existing core position while also incorporating climate objectives.
Now consider an investor who wants to align their core holdings with the goals of the Paris Agreement and seek attractive risk-adjusted returns. In this case, an alpha-seeking exposure that aims to deliver both explicit climate and performance targets may be appropriate. Such ‘unconstrained’ strategies may omit companies with high carbon emissions, then draw on proprietary insights – for instance the relationship between a company’s clean-energy patents and their financial performance – in pursuit of potential market outperformance.
The bottom line is that emerging data and analytics have made it possible to embed climate readiness into the core of portfolios using both alpha-seeking and index-tracking strategies.
