Standard carbon-reduction investment approaches can lead to unintended consequences for superannuation funds
- Research underpins the Australian Prudential Regulation Authority’s (APRA) recent acknowledgement of climate change as a material financial risk
- Firm’s strategy accounts for more criteria such as carbon reserves & green energy ratios
SYDNEY, 7 March 2017 – Russell Investments has published new research investigating how investors can reduce the carbon footprint of their equity portfolio without materially affecting investment performance. The paper—entitled Decarbonisation 2.0: Russell Investments’ sustainable investing solution for the energy transition—reveals how a standard decarbonisation approach can unintentionally lead to reduced exposure to renewable energy and a reduction in the aggregate environmental, social and governance (ESG) profile of a portfolio.
This research, which builds on the firm’s earlier cutting-edge “Decarbonisation 1.0” research findings released in 2015, coincides with APRA’s recent announcement to the financial services industry that insurers and superannuation funds have a duty to calculate the financial risks associated with climate change.
“Our objective is to help investors align portfolios with the transition to a low-carbon economy without changing the return profile or introducing unintentional risks,” said Scott Bennett, director, Equity Strategy and Research, at Russell Investments and one of the authors of both research papers. “Going beyond reduction of carbon footprint alone, the portfolio is designed to have both a higher aggregate ESG score as well as increased exposure to renewables relative to the benchmark.”
Mr Bennett added that decarbonisation portfolios can and should go beyond just carbon reduction to incorporate broader sustainability considerations, including exposure to renewable sources of energy and responsible business practices in support of a more sustainable ‘real’ economy. For example, the firm’s decarbonisation strategy accounts for a wider range of measurements such as the ESG score, carbon footprint, carbon reserves and green energy ratios.
“We’ve seen a proliferation of carbon-themed investment solutions in both public and private markets and this will continue,” said Russell Investments’ Head of Strategic Partnerships for Australia Nicki Ashton. “Better data leads to better understanding of the potential risks, modelling and stress testing as well as a greater ability to mitigate some of the long–term risks associated with climate change.”
Ms Ashton pointed out that the firm’s “decarbonisation 1.0” research report analysed four effective decarbonisation strategies to provide readers with a framework to evaluate them based on a common investment objective and additional measurable ‘success’ criteria.
“When we looked across the full range of success criteria and alignment with the Montreal Pledge and the Portfolio Decarbonisation Coalition, we sought the best combination of robustness, intuition and transparency,” Mr Bennett said. “The research validated our unique outcome-oriented approach developed to achieve a greater than 50% reduction in the carbon footprint and deliver benchmark-like returns.”
He added that Russell Investments maintains an active research agenda on ESG-related topics with the goal of continuously fine-tuning its knowledge base and evolving its investment approach.
“Specific opportunities for further research include incorporating some broader criteria for resource efficiency starting with the introduction of water intensity metrics and fleet efficiency,” added Mr Bennett, who plans to meet with several large Australian superannuation funds in mid-March to discuss options for integrating climate change solutions into their portfolios.
About Russell Investments
Russell Investments, a global asset manager, offers multi-asset portfolios and services which include advice, investments and implementation. Russell Investments stands with institutional investors, financial advisors and individuals working with their advisors—using the firm’s core capabilities that extend across capital market insights, manager research, asset allocation, portfolio implementation and factor exposures—to help each achieve their desired investment outcomes. The firm has more than AUD$356 billion in assets under management (as of 31/12/2016).
Headquartered in Seattle, Washington, Russell Investments operates globally with 21 offices, providing investment services in the world’s major financial centers such as London, Paris, Amsterdam, Sydney, Tokyo, Shanghai, Toronto and New York. For more information about how Russell Investments helps to improve financial security for people, visit https://russellinvestments.com/au/
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First Used: March 2017.