How to turn your climate ambition into portfolio action
This is the second article in our three-part series supporting the release of the latest edition of ‘Investing for Global Impact: A Power for Good’. For more information, please see the links at the bottom of the page.
Please note: The article does not constitute advice or any form of investment recommendation. This article is intended to be informative. Any specific views or opinions expressed in this article are based on the insights provided in the ‘Investing for Global Impact: A Power for Good’ 2022 report, which is developed by Campden Wealth, in partnership with Barclays Private Bank and Global Impact Solutions Today. This article does not intend to express any views or opinions of Barclays nor its directors, officers, employees, representatives or agents.
From ambition to action
As climate change accelerates, so do the potential risks, and opportunities, for investors. Taking action in your portfolio in anticipation of this reality means you could potentially reduce risks and reap financial rewards. Moreover, it could enable you to use your wealth to play a positive role in tackling climate change.
This aligns with findings from the 2022 edition of the ‘Investing for Global Impact: A Power for Good’ report, where 84% of investors surveyed see the role of private capital, alongside governments and other actors, as essential to address climate change1.
In our previous article on How to start your journey to a greener portfolio, we discussed setting your ambitions and investment strategy to help benefit the planet and your portfolio.
In this second instalment, we focus on turning those ambitions into action. We outline how you might think about your existing holdings, future investment selection, and holistic implementation. As ever, these are general thoughts on the approach, and professional advice should be sought as required.
1. Review your existing portfolio
Before taking action, perhaps the best first step is not to take any. Start by assessing your current portfolio against two useful measures – your climate ambitions, and your portfolio’s climate impact.
Hopefully, following the last article, you’ll have a written set of broad climate goals and an investment strategy agreed with family members or stakeholders. With this to hand, it’s possible to review your existing investments against your ambition.
First, ask yourself how closely your current portfolio reflects the ambition and strategy you articulated. Then, for each holding, does it align with your aims? Are there any holdings that are clearly in conflict? For example, if your primary aim is to “Avoid harm” to the environment, are there holdings that disproportionately contribute to climate degradation (and are unlikely to change)?
Or are there holdings that may be acceptable today, but cause you concern as you think about the future? For example, industries where risks of stranded assets make them potentially less attractive for your financial ambitions. Finally, are there any gaps in your portfolio? This may be where you’ve decided more capital should be contributing to solutions, and therefore you’d want to hold more assets that directly address climate change.
Naturally, the hurdles for these holdings will be personal. Even the intuitive feeling of satisfaction/dissatisfaction about what’s in your portfolio is a good starting point. Especially given that we know from a behavioural finance perspective, your investments generate emotional returns as well as financial ones.
Assessing your current portfolio’s climate impact
There are a variety of potential metrics and approaches to use – e.g. carbon footprinting, alignment with the Paris Agreement, assessment of real world impact, and transition risk assessment. Each has pros and cons; all have limitations. Most significantly, the quality of carbon data across asset classes means all these methods provide approximations. However, the aim here is not perfect accuracy, but new insight into your holdings.
After applying one or more of the methodologies to your portfolio, you should have a better understanding about the climate risks and opportunities you face. For example, which holdings generate the most carbon? Which may be most at risk from sudden governmental policy changes? Which companies are on-/off-track to meet their net-zero commitments?
This assessment can help you prioritise where you could lower investment exposure to carbon risks, or where you may want to select alternative companies that better fit your aims to decarbonise your portfolio. Or, similar to 47% of ‘Investing for Global Impact’ respondents who knew their carbon footprint, to provide a baseline to actively manage it downwards with a target or goal in mind.1
2. Establish criteria for investment selection
Next, investors could decide what investments might feature in their portfolios. From your prior assessment, some holdings may be obvious candidates to remove or replace. But the bigger question is, what should be included in the future portfolio?
Today, there is a wide range of climate-related investments across most asset classes, sectors, and geographies – from publicly-listed companies to private equity investments, from green and sustainable bonds to green structured notes, from passive to active strategies.
This provides multiple ways for investors to make their portfolios greener – e.g. constructing their entire portfolios with climate-aware assets, replacing certain holdings in a particular asset class with greener substitutes, or running satellite investments of climate-related innovation and solutions.
Additionally, climate is not a singular issue, with a single investment option. There are many potential themes from which to choose. Previously, in our article ‘Investing for a greener future’, we outlined three trends with multiple entry points:
- addressing energy needs and climate change
- reducing environmental footprint
- conserving biodiversity and the natural environment
With such a broad choice available, it can be useful to start by focusing on a specific theme, then deciding how best to access it for you. For example, investing in clean energy is a familiar way to help drive the transition to a lower-carbon world. We explore the options for investing in clean energy in more detail in our Outlook 2023 article, ‘The case for investing in clean energy’.
Yet, even within the theme, opportunities exist across asset classes and sub-sectors. For example, would exposure to clean energy producers or utilities transforming the grid with renewables be more attractive? Or perhaps the companies providing the components or infrastructure? Alternatively, how would investing in a global equity fund with a range of established companies compare with investing in growth-stage ventures via direct, private investments?
As with all investments, there are trade-offs in terms of risk-return expectations, availability, or liquidity, for example. In part, deciding what’s right for your portfolio is as important as finding a high-quality investment. Here, using the same approaches to assess your existing portfolio – your ambitions and climate impact – could provide useful reference points to help with selection.
3. Implement holistically
Ultimately, it’s likely that some changes will have to be made to make your portfolio greener. However, as with any investment decision, it’s critical not to make them in isolation.
Consider any changes in the context of your overall financial goals, time horizons and risk appetite. For example, decarbonising your portfolio by exiting or excluding carbon-intensive sectors may reduce your carbon contribution, but could also have implications in the short and long term for the financial aspects of the portfolio. Or deciding to invest in early-stage companies may provide greater exposure to climate solutions, but investing in private companies generally means less liquidity and a longer time horizon to see returns.
Consider also your tolerance for volatility. Having a strong tilt out of some carbon-intensive sectors, which tend to be defensive, and towards growth companies, could mean that portfolio performance is driven by factor rotation for certain periods. Additionally, investor enthusiasm or uncertainty around which emerging technologies will prove most successful could also drive some market swings as they evolve. Having a longer-term time horizon, and good fundamental analysis, could be part of the selection process. Anticipating this volatility, along with good behavioural finance coaching to overcome biases, might help you stay the course.
There are also wider family or financial circumstances to take into account. Exiting holdings typically generates capital gains implications, which may need tax advice and thoughtful timing on when to execute trades. Similarly, the topic of climate change can provide an excellent bridge to engage younger generations, who tend to be passionate about the topic, to help prepare them to take on family wealth.
Finally, investment opportunities to address climate change continue to emerge, so it’s possible to phase and build on your strategy over time.
Should you invest in fossil fuel companies?
The decision of whether to hold fossil fuel companies in portfolios is a good example of the divergent views in the market. In the latest ‘Investing for Global Impact’ report, opinion was split among investors, with 57% in favour and 43% against1.
Most who did not want to hold them indicated it was due to the planetary damage they cause; others noted it was due to increased financial risk, from legal and regulatory changes, or due to the risk of stranded assets. Of those who favoured investment, most believe fossil fuel companies have a role in the energy transition, while others saw the opportunity of holding their stock as a way to engage and influence them to change.
Clearly, there are several factors for consideration, but the decision ultimately comes down to your ambitions and the implications for your portfolio.
Base: All respondents (149)
Source: Campden Wealth / GIST Initiatives / Barclays Private Bank, ‘Investing for Global Impact’ 2022
Figures may not add up to 100% due to rounding
Transitioning your portfolio to be better prepared for climate change is neither a perfectly linear, nor a one-off, process. Like all investing, as markets change, ensuring your portfolio remains aligned to both your investment and climate objectives is a continual process.
At some point you’ll likely want to know if your portfolio is meeting your climate ambitions, which involves impact measurement, reporting, and monitoring. You can read more on this in the final article of this series ‘How to manage your portfolio's climate impact’.
Alternatively, visit our dedicated Investing for Global Impact hub for more related content, or download the full report.
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