The truth about climate-aware investing
We believe climate change represents a portfolio risk and opportunity that can no longer be ignored, and all investors should consider incorporating climate-change awareness into their investment processes .
This week’s chart helps drive home the point that climate-aware investing does not have to mean significantly changing a portfolio’s return pattern or compromising on traditional goals of maximizing investment returns.
One approach is to optimize benchmarks for climate factors. This means overweighting green companies and underweighting climate offenders, while keeping a portfolio’s return profile close to the benchmark. Smallish portfolio tweaks can make a big difference in reducing climate-change risks, as evident in this week’s chart.
It is possible, for example, to cut a portfolio’s carbon emissions by around 70% while keeping the tracking error (the deviation of returns from the benchmark over time) within 0.3% annually. See the chart below.
Strategies for climate-proofing portfolios
Benchmark optimization is just one strategy for potentially climate-proofing portfolios. Other climate-aware investing methods include investing in benchmarks that take climate into account, or proactively investing in climate-aware companies. U.S. companies with higher climate scores—our measure of companies’ resource efficiency and exposure to climate-change related risks and opportunities—tend to be more profitable and generate higher returns on assets, according to our simulations and analysis.
Bottom line: We believe there is little downside to gradually incorporating climate-change awareness into the investment process—and even potential upside. Read more on climate change in the BlackRock Investment Institute’s latest publication Adapting Portfolios to Climate Change , and find more market insights in my Weekly Commentary .
Richard Turnill is BlackRock’s global chief investment strategist. He is a regular contributor to The Blog .
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