Net-zero heroes: emitting the right signals

As investors increasingly seek climate change-aligned investment solutions, our investment experts explored how net zero priorities can be integrated within index portfolios.

Jeannette Andrews, Senior Global ESG Manger, and Fadi Zaher, Head of Index Solutions & Investment Specialists, joined Stefan Bilby, Head of Index Distribution, to address a number of topics.

As the world grapples with meeting ambitious net-zero carbon emissions by 2050 targets, there is plenty more work to be done; indeed, we believe that fewer than 10% of companies today are on track to meet this target. Climate risk poses a very real long-term financial risk to investors, and we are finally seeing widespread acknowledgment of this.

How can investors mitigate climate risk in index-based portfolios? There are a few ways in which to decarbonise index strategies, including exclusions and capital reallocation; we deploy both approaches.

Exclusions – also known as negative screening – involve avoiding specific stocks or industries represented in an index. Capital reallocation can involve reducing emissions intensity by a fixed percentage relative to a parent benchmark. The goal is to reallocate the exposure from high to low-carbon intensive stocks, while keeping active weights within certain geographic, sectoral and security-level limits.

At LGIM, we also focus on engagement. This comes in the form of long-term – multi-year – and transparent communication with companies, outlining LGIM’s expectations around their climate transition strategy, with exclusion remaining an option on the table in the event of a failure to take the steps required.

It is a complex topic but our approach is to keep it as simple as possible. Through clear and transparent engagement, and a combination of exclusion and non-exclusion, we believe it is possible to both meet the needs of clients and help facilitate the wide-ranging market change required to meet the world’s climate targets.

To watch the webinar, and listen to our experts’ insights in full, as well as their responses to client questions, you can access the recording here.

Key risk: The value of any investment and any income taken from it is not guaranteed and can go down as well as up, and investors may get back less than the amount originally invested.