Don’t get lost on the road to Paris

How to avoid the unintended consequences of a net-zero portfolio

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Asset owners are setting bold net-zero targets. Rather than simply excluding carbon-intensive assets from the portfolio, many want to play a more meaningful role in the transition to a low-carbon economy.

But making pledges and announcing targets is the easy part. Critics of ESG investing acknowledge that it makes capital more expensive for heavy-emitting companies, but they question how effective it is in reducing carbon on a global level. Moreover, from a fiduciary perspective, future-proofing returns in a low-carbon economy presents a challenging balancing act.

“It’s a case of thinking about how we can support economy-wide decarbonisation,” says Claire Jones, Partner and Head of Responsible Investment at LCP, an investment pensions and financial consulting firm. “We need to avoid the physical risks of warming scenarios if we possibly can. It’s no good just having a handful of stocks in the portfolio that already have zero emissions. You need the hardest to decarbonise industries on the net-zero pathway as well.”

As an asset owner, aligning your investment strategy with the 1.5-degree target set out in the Paris Agreement will increasingly mean providing greater detail on the engagement strategies and scientific rigour that underpin your approach.

A need for nuanced understanding

The priority is to understand the decarbonisation challenges of every asset class in the portfolio – from the potential for engagement to data availability and the variety of transition pathways. Each also has its own nuances in terms of the impact of climate on risk-return profiles.

By factoring these insights into your decarbonisation approach, you can avoid many of the unintended consequences of making decisions at a portfolio level.

Phil Cliff Audio Interview Preview

Listen to Phil Cliff, Head of Climate at M&G Investments in discussion with Sean Kearns, Editor in Chief at Longitude.

“Aligning your investment strategy with the Paris Agreement will increasingly mean providing greater detail on the engagement strategies and scientific rigour that underpin your approach."

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