Sponsored feature: Climate change investing – stop talking, start acting

For many investors the question is no longer when will they need to take steps to limit the impact of climate change on their portfolio — but how to do it effectively now. At State Street, we’ve been studying this question for several years. We’re already partnering with clients to help them actively address climate risk in their portfolios through active stewardship of their assets and by creating climate focused investment strategies based on a robust data framework.

Start with asset stewardship
We’re committed to partnering with our clients to help them align their portfolios with all of their investment objectives and regulatory requirements. That’s why we have made stewardship related to ESG issues a cornerstone of our approach to asset management.

Don’t just avoid the risk, target the opportunity
Forerunners in the climate space are using mitigation/adaption to not just avoid future risk but to actively target future opportunities. Investors should be looking at companies that are not just window dressing or coping but actually positioning to take advantage from a less carbon-intensive economy.

Work with the right data
One of the key problems for ESG investors is data. There is plenty of data but it is often inconsistent, low quality or stale and with many gaps.

Our new ESG and climate data platform brings together carbon and environmental metrics from multiple data providers, including greenhouse gas emission data, green and brown revenues, and company adaptation to climate change.

The data supports our extensive research in equity and fixed income portfolio construction, whether actively or passively managed, and can be applied to screening, mitigation and adaptation.

Be clear, be systematic
Our climate sustainability solutions are built on our robust data framework that effectively quantifies the relevant criteria; they target clear climate criteria and they optimize within those clear criteria.

We are able to filter out only the highest conviction candidates as the basis of our solutions. The result is solutions that are systematic and rules-driven, and that can achieve their climate aims and produce investment results.

Optimize for success
Implementing a successful sustainable climate strategy requires addressing a more complex problem than simply avoiding the worst offenders.

We know from our factor investing experience that a well-considered optimization makes for better outcomes.

For example, we’ve recently used this optimization approach on a substantial portion of a client’s portfolio to successfully reach a different environmental aim — to reduce the carbon emission profile of its assets by 70% via an equity index strategy. Slightly different aim but common portfolio construction tool.

Our climate strategy solutions employ optimization to ensure that we balance exposure across five key metrics, resulting in an optimized high-impact portfolio.

5 clear objectives for climate investing

Minimize exposure to carbon emission
he cornerstone of any climate-focused strategy. We expect companies with high direct carbon emissions to face increasing challenges such as increased energy costs as carbon pricing regulations become more widespread.

Minimize exposure to fossil fuel emissions
We view fossil fuel reserves as future carbon emissions. The IEA projects that by 2040, renewables are expected to meet approximately 40% of global energy demand.

Minimize exposure to brown revenue
Brown revenue is the proportion of revenues derived from activities related to the extraction of fossil fuels, or power generation using fossil fuel-based energy sources. It reflects firms tied to the conventional energy value chains.

Minimize exposure to green revenue*
Rapid deployment of solar and wind energy and mass adoption of electric vehicles — accompanied by the adoption of other renewables and a range of low-carbon technologies — are essential to achieving 2°C targets.

Minimize exposure to climate adaptation ratings*
Specifically, we look to maximize exposures to those companies that are showing preparedness for the future with respect to climate risk.

Portfolio Construction
How best to build a portfolio that attains all five objectives? Exclusionary screening or divestment from securities based on the five exposure metrics above cannot produce a portfolio that consistently delivers strong exposure and certainly not maximum exposure. So, our approach is to use a mean-variance optimization where the objective function balances exposure across all five metrics, resulting in an optimized high-impact portfolio.

The end result should be solutions that achieve meaningful reductions in targeted climate-related exposures coupled with significantly increased exposure to green sector and low-carbon revenues, helping asset owners truly prepare their equity portfolio for the transition to a low-carbon economy.

By Rakhi Kumar, Senior Managing Director and Head of ESG Investments and Asset Stewardship at State Street Global Advisors

Marketing Communication. For Professional Clients Use Only. *Future looking indicators. The information provided does not constitute investment advice as such term is defined under the Markets in Financial Instruments Directive (2014/65/EU) and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any investment. It does not take into account any investor’s or potential investor’s particular investment objectives, strategies, tax status, risk appetite or investment horizon. If you require investment advice you should consult your tax and financial or other professional advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information. State Street Global Advisors Belgium, Chaussée de La Hulpe 120, 1000 Brussels, Belgium. T: 32 2 663 2036, F: 32 2 672 2077. SSGA Belgium is a branch office of State Street Global Advisors Ireland Limited. State Street Global Advisors Ireland Limited, registered in Ireland with company number 145221, authorised and regulated by the Central Bank of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. The views expressed in this material are the views of SSGA Investment Strategy through the period 1 January 2019 and are subject to change based on market and other conditions. This communication is directed at professional clients (this includes eligible counterparties as defined by the [Financial Services & Markets Authority (FSMA)] who are deemed both knowledgeable and experienced in matters relating to investments. The products and services to which this communication relates are only available to such persons and persons of any other description (including retail clients) should not rely on this communication. The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research. Investing involves risk including the risk of loss of principal. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent. © 2019 State Street Corporation. All Rights Reserved. 2487024.3.1.EMEA.INST. Exp. Date: 30/04/2020.

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