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Institutional capital has a powerful role in supporting and accelerating the transition to a low carbon economy.
Global efforts to combat climate change have prompted many asset owners, asset managers, corporations and countries to establish net zero greenhouse gas emissions targets by 2050 or sooner. Institutional investors have several mechanisms to align portfolios emissions reduction targets, which include reducing exposure to carbon-intensive sectors, increasing allocations to carbon-efficient or low carbon investments, and investing in climate solutions that remove CO2 from the atmosphere.
Building on our ongoing research into the traditional portfolios benefits of real assets, namely: diversification, inflation hedging, yield and liability we demonstrate how carbon metrics can be incorporated into portfolio design and the role real assets can play in decarbonizing portfolios.
We expand our understanding of traditional portfolio construction tools by adapting the standard portfolio allocation model to include the carbon intensity characteristics of stocks, bonds and real assets. This allows investors to optimize diversified portfolios across the three dimensions of risk, return and carbon intensity and to quantify trade-offs that may exist across financial and climate performance.
Highlights
- The role of real assets in portfolio decarbonization and achieving net zero globally
- The benefits of real assets for institutional portfolios
- Risk, return and carbon profiles of traditional and real assets
- Adapting standard portfolio optimization model to incorporate carbon objectives
- Quantifying tradeoffs and optimizing for risk-return and carbon
- Investment implications
CFA® and Chartered Fiduciary Analyst® are registered trademarks owned by CFA Institute.
Diversification does not assure a profit or protect against loss.
Important information on risk
Past performance is no guarantee of future results. All investments carry a certain degree of risk, including the possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Certain products and services may not be available to all entities or persons. There is no guarantee that investment objectives will be achieved.
Investors should be aware that alternative investments are speculative, subject to substantial risks including the risks associated with limited liquidity, the potential use of leverage, potential short sales and concentrated investments and may involve complex tax structures and investment strategies. Alternative investments may be illiquid, there may be no liquid secondary market or ready purchasers for such securities, they may not be required to provide periodic pricing or valuation information to investors, there may be delays in distributing tax information to investors, they are not subject to the same regulatory requirements as other types of pooled investment vehicles, and they may be subject to high fees and expenses, which will reduce profits.
As an asset class, real assets are less developed, more illiquid, and less transparent compared to traditional asset classes. Real asset investments will be subject to risks generally associated with the ownership of real estate-related assets and foreign investing, including changes in economic conditions, currency values, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties.
Responsible investing incorporates Environmental Social Governance (ESG) factors that may affect exposure to issuers, sectors, industries, limiting the type and number of investment opportunities available, which could result in excluding investments that perform well.
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