Investing in Green and Climate Strategies
How to Achieve Climate and Net Zero Goals with Paris-Aligned Portfolio Strategies
The climate-aware Paris-aligned framework, against which less than 1% of global assets are currently managed, adopts a multi-pronged, forward-looking approach to dealing with climate risks. We expect the approach to gain in popularity.
In our historical analysis, risk was similar to the parent benchmark, leading to a low tracking error. Security selection, through the use of climate metrics, partly contributed to benchmark-relative returns.
The strategies mitigated physical climate risks and transition risks while benefiting from green revenue opportunities.
To start, it is important to highlight how climate-aware investing is different from ESG investing. ESG investing uses environmental, social and governance factors to evaluate companies on how sustainable they are along all three dimensions. Climate investing focuses on mitigating climate change and reaping opportunities.
For certain sectors, such as insurance writing, climate risks are tangible as any increase in the severity and frequency of natural disasters can adversely impact underwriting risks, especially in the property and casualty segments. Recognising the potentially huge costs associated with climate, the French central bank released the first results of its climate stress tests in 2021, which found that natural disaster-related insurance could rise up to five-fold in the country’s most affected regions.1
In this paper, we examine how investors can incorporate climate-aware indices into an investment portfolio from a strategic asset allocation standpoint. To this end, we examine how climate-aware indices, namely the MSCI Climate Paris Aligned index series, differ from their traditional market-value-weighted counterparts.
As a reminder, the MSCI Climate Paris Aligned indices seek to maintain diversified exposure to equities within a tight tracking error budget, while improving on their green credentials through reducing climate risks and pursuing opportunities as well as aligning with the Paris Climate Accord commitments.
Invest in a Climate-Conscious Manner
The world is increasingly acknowledging the dangers of climate change and grappling with the challenges of its consequences. This awareness is present in the investment community, where investors continue to allocate huge sums of money into climate investment funds.
According to Morningstar, assets in European climate funds doubled in 2021 to $325 billion.2 However, under 1% of global total assets have a temperature pathway that is aligned with the Paris Agreement, with the majority of the other assets aligned to over 2.75oC of global warming.3 Recognising the increasing importance that investors attach to climate change issues, 457 investors (representing more than $41 trillion in assets under management) recently signed the 2021 Global Investor Statement to Governments on the Climate Crisis, which urges governments to work with institutional investors to “raise ambition and accelerate action to tackle the climate crisis by reducing global net carbon emissions by 45% from 2010 levels by 2030.”4
Other initiatives undertaken by investors include the commitments made by some asset owners (for example, signatories to the Net Zero Asset Owner Alliance) to set targets to reduce emissions and increase allocation to climate solutions.
The rising investor focus on climate change issues and sustainable finance had existed for some years but was further bolstered by the European Commission’s launch of the Sustainable Finance Action Plan in 2018, which created standards for benchmarks that seek to address climate risks and avoid “greenwashing.” Two types of benchmarks, the EU Climate Transition Benchmark and the EU Paris-aligned Benchmark, were defined. The former is seen as a tool to facilitate the transition to a low-carbon economy while the latter, which is much more ambitious, seeks to favour companies with sustainable business models and serves as a tool for investors at the forefront of the climate transition.
1 Source: Climate risk for insurers, S&P Global. 2 Climate Investing in 2022: Our Bumper Report, Morningstar. 3 Source: October 2021, CDP. 4 Halper et al. (2022), Asset Management Industry Confronts the Challenges Presented by Climate Change Transition, Harvard Law School Forum on Corporate Governance.
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The returns on a portfolio of securities whichexclude companies that do not meet theportfolio’s specified ESG criteria may trail thereturns on a portfolio of securities which includesuch companies. A portfolio’s ESG criteria mayresult in the portfolio investing in industrysectors or securities which underperform themarket as a whole.
Past Performance is not a guarantee offuture results.
The value style of investing that emphasizesundervalued companies with characteristics forimproved valuations, which may never improveand may actually have lower returns than otherstyles of investing or the overall stock market.“A “quality” style of investing emphasizescompanies with high returns, stable earnings,and low financial leverage. This style ofinvesting is subject to the risk that the pastperformance of these companies does notcontinue or that the returns on “quality” equitysecurities are less than returns on other stylesof investing or the overall stock market.”The Fund may emphasize a “growth” style ofinvesting. The market values of growth stocks maybe more volatile than other types of investments.The prices of growth stocks tend to reflect futureexpectations, and when those expectationschange or are not met, share prices generally fall.The returns on “growth” securities may or may notmove in tandem with the returns on other styles ofinvesting or the overall stock market.
The momentum style of investing emphasizesinvesting in securities that have had higherrecent price performance compared to othersecurities, which is subject to the risk that thesesecurities may be more volatile and can turnquickly and cause significant variation fromother types of investments.
Low volatility funds can exhibit relative lowvolatility and excess returns compared to theIndex over the long term; both portfolioinvestments and returns may differ from thoseof the Index. The fund may not experience lowervolatility or provide returns in excess of theIndex and may provide lower returns in periodsof a rapidly rising market. Active stock selectionmay lead to added risk in exchange for thepotential outperformance relative to the Index.
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ETF's worden verhandeld zoals aandelen, zijn onderhevig aan beleggingsrisico, fluctueren in marktwaarde en kunnen worden verhandeld tegen prijzen boven of onder de netto-inventariswaarde van de ETF’s. Brokercommissies en kosten van de ETF zullen het rendement verminderen. De wijzigingen in wisselkoersen kunnen een nadelig effect hebben op de waarde, prijs of inkomsten van een belegging. Verder is er geen garantie dat een ETF zijn beleggingsdoelstellingen zal behalen.
DE SPDR-ETF'S VAN SSGA ZIJN MOGELIJK NIET BESCHIKBAAR OF GESCHIKT VOOR U. DE UITGEDRUKTE MENINGEN/INFORMATIE OP DEZE SITE VORMEN GEEN BELEGGINGSADVIES, FINANCIEEL, JURIDISCH, REGLEMENTAIR, BOEKHOUDKUNDIG OF BELASTINGADVIES. BIJ TWIJFEL DIENT MEN STEEDS ONAFHANKELIJK ADVIES IN TE WINNEN. DE INFORMATIE NOCH ENIGE OPINIE OP DEZE SITE VORMT EEN VERZOEK OF AANBOD VOOR DE AAN- OF VERKOOP VAN AANDELEN VAN DE FONDSEN OF ENIG ANDER FINANCIEEL INSTRUMENT.Standard & Poor’s®, S&P® en SPDR® zijn gedeponeerde handelsmerken van Standard & Poor's Financial Services LLC (S&P); Dow Jones is een gedeponeerd handelsmerk van Dow Jones Trademark Holdings LLC (Dow Jones); en deze handelsmerken zijn in licentie gegeven voor gebruik door S&P Dow Jones Indices LLC (SPDJI) en in sublicentie voor bepaalde doeleinden door State Street Corporation. De financiële producten van State Street Corporation worden niet gesponsord, bekrachtigd, verkocht of gepromoot door SPDJI, Dow Jones, S&P, hun respectieve filialen en externe licentiegevers, en geen van deze partijen doen enige verklaring over de raadzaamheid om te beleggen in dergelijke producten, noch aanvaarden zij enige aansprakelijkheid in verband hiermee, inclusief voor fouten, weglatingen of onderbrekingen van een index.
SPDR-ETF's mogen enkel worden aangeboden en verkocht in rechtsgebieden waar dat is toegelaten in overeenstemming met de geldende regels.
Informatie met betrekking tot Mexico
Deze informatie is geen marketing of aanbieding van effecten en is niet ook niet zo bedoeld, en mag bijgevolg niet als dusdanig worden opgevat. De fondsen waarnaar in dit document wordt verwezen, zijn niet en zullen niet worden geregistreerd onder de Mexicaanse wet op de effectenmarkten (Ley del Mercado de Valores) en mogen in Mexico niet aan het publiek worden aangeboden of verkocht. De documentatie met bekendmakingen in verband met een van de bovengenoemde fondsen mag niet openbaar worden verspreid in Mexico en aandelen van de fondsen mogen niet worden verhandeld in Mexico.
SSGA SPDR ETFs Europe I Plc en SSGA SPDR ETFs Europe II Plc zijn beleggingsmaatschappijen met variabel kapitaal opgericht als fondsen met afzonderlijke aansprakelijkheid tussen de compartimenten volgens de wetten van Ierland en erkend door de Central Bank of Ireland conform de Europese verordening van 2011 over instellingen voor collectieve belegging in effecten. U moet het prospectus en de essentiële beleggersinformatie (KIID) met betrekking tot specifieke SPDR-ETF's aanvragen en zorgvuldig lezen alvorens u belegt. Voor meer informatie en het prospectus/KIID met de kenmerken, kosten en risico's van SPDR-ETF's kunt u nu een prospectus of KIID downloaden, of kunt u deze documenten verkrijgen bij uw financieel adviseur of bij uw lokale SSGA-kantoor.
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Alvorens u belegt, moet u de beleggingsdoelstellingen, risico's, vergoedingen en kosten van de fondsen in overweging nemen. Een prospectus met deze en andere informatie kunt u downloaden of aanvragen bij uw financieel adviseur. Lees het zorgvuldig alvorens te beleggen.
SPDR® Dow Jones® Industrial Average ETF staat genoteerd en is geregistreerd voor verkoop in Nederland.