How to Decarbonize Multi-Strategy Equity Portfolios: Practical Considerations
In the past few years, we have seen a growing number of Asian investors setting decarbonization targets for their equity portfolios. Some investors are interested in achieving carbon intensity reduction versus their market-cap based policy benchmark, while maintaining the desired broad market exposure. Using a model portfolio to demonstrate, we believe this analysis offers a practical way for investors with climate-related investment goals to potentially reduce carbon intensity of listed equity portfolios, while at the same time maintaining the overall asset exposure of an investor’s investment strategy.
We first review the asset allocation and carbon intensity of a Model Portfolio typical of an Asia Pacific (APAC) domiciled investor. We then briefly explore climate indices, potential carbon reductions that can be achieved versus the traditional market-cap based benchmark, and analyze potential tracking error.
To demonstrate how to target various carbon reduction scenarios for the Model Portfolio, we provide a case study by reallocating the market-cap based index investment to its lower carbon intensity investment within the same equity sleeve. Given most APAC domiciled institutional investors typically would also invest in active strategies in their listed equity mix, we explore briefly how an active strategy can play a role in overall carbon reduction for an investor. We also touch on investee company engagement, which could help drive down carbon intensity of the investment universe over the long term.