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How to start your journey to a climate-ready investment portfolio

How to start your journey to a climate-ready investment portfolio

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

This article is part of 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.

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 factors to consider when designing a strategy to protect the planet and your portfolio.

The UN’s Intergovernmental Panel on Climate Change (IPPC) report published in August1 provided a stark and severe warning about climate breakdown, stating human behaviour was “unequivocally” forcing up temperatures, with UN Secretary-General António Guterres signalling a “code red for humanity”2.

The report confirms that without much deeper cuts to carbon emissions in the next few years, the global average temperature will exceed 1.5 degrees earlier than the predicted timeline of 2040. For individuals, families, and family offices, this means their portfolios will also need to be adapted sooner to be ahead of the colossal changes that will be required.

Good intentions and good options

The good news is that many of the world’s leading ultra-high-net-worth (UHNW) investors and family offices have already started taking action.

As revealed in the 2021 edition of ‘Investing for Global Impact: A Power for Good’, 80% of investors surveyed factor climate change into their decisions, and 30% of all respondents said they are actively targeting investments that support the transition to a low-carbon economy3.

Constructing or changing an existing large and diverse portfolio to account for the risks and opportunities of climate change might feel like a major undertaking, but it doesn’t have to be. One approach is to break down the journey into three stages, starting with establishing your aims, then updating your portfolio and finally, measuring and managing its impact.

This is the first of three articles focusing on how to make your portfolio more climate-ready. Here we discuss how you can start your journey by setting out your intentions and aims. 

Sustainable investment cycle

Sustainable Investing cycle - How effective sustainable investing looks across the entire cycle of investing.

What are my and my family’s unique ambitions?

The process starts by defining your destination: if you don’t know where you want to go, you’re unlikely to get there. It’s a simple but important question of deciding, in the context of climate breakdown, what impact you want your wealth to have.

To answer that question, it’s imperative to look within, rather than outwards, to consider why climate change matters to you and your family, and how you want the world to look in the future. Are you looking to mitigate risk and behave responsibly, or to be involved in shaping that future and actively make a difference you can measure? On a tangible level, do you want to invest in low-carbon businesses, or in innovative companies that are counteracting environmental damage?

Using the Impact Management Project’s ABC model can help frame your intentions. Consider whether your aims are broadly to “A”void harm, for example by excluding fossil fuel companies and high carbon emitters; or “B”enefit stakeholders, by investing in companies proactively seeking a positive climate impact; or “C”ontribute to solutions by investing in green projects or companies directly involved in tackling climate change.

Climate change is a large and complex issue, so spending time considering your ambitions and goals will help to clarify your next steps.

The ‘Investing for Global Impact: A Power for Good’ 2021 report provides a unique insight into the views of leading investors towards sustainable investing. In the report, Caroline Rupert explained how her family office has created a strong set of values and ESG considerations. These form part of all its decision-making, particularly for investments.

We want the office to be reflective of our values. There are certain things we have deliberately excluded from our investment mandate, even if they might be financially very interesting. Interestingly, where capital is fungible, the fact that we have strong ESG and ethical values is an important consideration for a lot of the founders we back too.

Caroline Rupert

Kathaka family office, Investing for Global Impact: A Power For Good 2021

Defining your aims

Having determined your broad ambition, the next step is to solidify it into changes to be made to your investment portfolio. This stage is about setting out a clearer vision for what you want your portfolio to achieve.

For example, are you looking to reduce carbon exposure across your portfolio to mitigate climate risk? Or are you looking to achieve a ‘net-zero’ portfolio that aligns with the Paris Agreement? If you are looking to make a more active contribution to tackling climate change, you might prefer to invest in earlier stage companies or projects that target specific, measurable climate outcomes to achieve your goals.

Other considerations are whether to change your portfolio in increments, and whether to reduce, or completely eliminate, fossil fuel exposure. Having a timeline in mind can also help you to benchmark your objectives and progress.

Designing your strategy

Once you have envisaged broad goals for your investment strategy and refined these into specific areas targeting climate change, it’s time to consult with your advisors about the best ways and options to implement them.

The goal here is to codify your ideas on paper, ideally in the form of a statement of investment principles, or perhaps more formally in an investment policy document. This can provide your investment managers with clear expectations, whether you’re asking them to review how your existing holdings align with your ambitions, or if you’re creating a new portfolio from scratch.

It is also an opportunity to emphasise specific sectors, topics, or themes of interest if you want to go beyond building a general climate-ready portfolio, and target areas closest to your heart, such as clean energy, sustainable agriculture or ocean economy.

Advisors can counsel on the practicalities of your ideas and important consequences that might arise, including potential changes to your risk profile. They can also feed back on the practicalities, including the timeline of putting your plan into action. Not everything needs to happen immediately, as traditional considerations, such as liquidity requirements, should also be factored into the decision-making process.

As discussed in the report, a sense of responsibility and strong values define Wendel Group’s investment approach.

When you have a very strong ESG strategy, it’s very important that the people you partner with also share these values. We want to partner with entrepreneurs who share our values so that we can build sustainable leaders for the future (…) not only do we do financial due diligence, we also do ESG due diligence before every investment. That’s extremely important for us.

Priscilla de Moustier

Chairman & Chief Executive Officer, Wendel Participations, Investing for Global Impact: A Power For Good 2021

How can I learn more?

Ultimately, it’s about setting out a strategy and then deciding where to start.

While the world needs to accelerate its efforts to combat the rapidly-rising threat of climate change, it doesn’t mean the investor response has to be hasty. Taking the time to establish a clear direction and aims is worthwhile in the pursuit of long-term returns and positive impact.

We’ll be releasing further articles on what investors can proactively do to become more sustainable in both purpose and 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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Download the Investing for Global Impact Report

Unique insight into the motivations and experiences of some of the world’s leading individual investors, families, family offices, and foundations when it comes to investing sustainably.

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