As investors increasingly look to incorporate Environmental, Social and Governance (ESG) criteria into their decision-making process, tackling the investment implications of a transition to a low carbon economy has been at the forefront of this movement. Our research has found that the standard decarbonization approach (a reduction in exposure to carbon emissions and/or divestment from fossil fuel reserves within equity portfolios) can unintentionally lead to reduced exposure to renewable energy and a reduction in the aggregate ESG profile of a portfolio.
In this paper, we present an enhancement to Russell Investments' original decarbonization strategy that incorporates three additional sources of insight informative to the sustainability profile of a portfolio:
- Increased exposure to renewable energy
- Incorporation of ESG scores
- Targeted reduction in coal exposure