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How to turn your climate ambition into portfolio action

15 October 2021

8 minute read

By Damian Payiatakis, Head of Sustainable and Impact Investing, Barclays Private Bank

This is the second article in a new series supporting the release of the 2021 edition of ‘Investing for Global Impact: A Power for Good’. For more information, please click the links at the bottom of the page. Please note: The article does not constitute investment advice.

From ambition to action

Climate breakdown is one of the greatest challenges of our time, and private investors’ capital can play a critical role in addressing it. Here we discuss translating your climate ambitions into action in your investment portfolio. 

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 avoid 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 2021 edition of the ‘Investing for Global Impact: A Power for Good’ report, where 86% of investors see the role of private capital, alongside governments and other actors, as essential to address climate change.

In our previous article on How to start your journey to a climate-ready portfolio, we discussed setting your ambitions and investment strategy to 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 always be sought.

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, such as green bonds.

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 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; and all have limitations. Most significantly, the quality of carbon data across asset classes means all of 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 are generating 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 40% 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.

2. Establish criteria for investment selection

Next, investors could decide what investments might feature in their climate-ready portfolios. From your prior assessment, some holdings will be obvious candidates to remove or replace from your portfolio. But the bigger question is what should be included in the future portfolio.1

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 green their portfolios – 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 many potential themes from which to choose. Previously, in our article on ‘Greening the economy’, we outlined three trends with multiple entry points: 1) Addressing climate change and energy needs, 2) Reducing environmental footprint, and 3) Conserving biodiversity and ecological systems.

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.

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 more climate-ready. 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 decisions 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, we’ve seen rapid flows into, and then out of, “green” stocks based on general excitement about the climate trend. Having a longer-term time horizon, and good fundamental analysis, should 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 2021 ‘Investing for Global Impact’ report, opinion was fairly evenly split among investors, with 53% in favour and 47% against.

Most who did not want to hold them indicated it was due to the planetary damage they caused; others noted it was due to increased financial risk, from legal and regulatory changes, or due to 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 a number of factors for consideration, but the decision ultimately comes down to your ambitions and the implications for your portfolio.

What’s next?

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 one.

At some point you’ll likely want to know if your portfolio is meeting your climate ambitions, which involves impact measurement, reporting, and monitoring. Look out for the final article in this series where we’ll discuss how to manage your portfolio’s climate impact.

You can find all of the associated content on our dedicated hub, and you can download the full ‘Investing for Global Impact: A Power for Good 2021’ report to find out more.

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Investing for Global Impact

The global appetite for sustainable investing is growing at a phenomenal pace. Find out how investors are influencing tomorrow in the 2021 ‘Investing for Global Impact’ report.

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