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Portfolio perspectives | Podcast - 11:05 MIN

Talking Heads – Taking a closer look at climate focused equity investing

Daniel Morris
2 Authors - Portfolio perspectives
29/08/2023 · 4 Min

Within the thematic investing approach, climate-focused strategies allow investors to invest in companies with a climate-friendly strategy and so do good while earning a return. Such strategies can enable them to manage future (climate) risk, benefit from long-term opportunities and leverage strong support from regulators and policymakers in the fight against climate change.    

Listen to this Talking Heads podcast with Martina Jung, Portfolio Manager for European Equities, and Daniel Morris, Chief Market Strategist. They discuss developments since the 2015 Paris Agreement and ways to implement sustainability-related criteria in stock selection and portfolio construction.

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Read the transcript

This is an article based on the transcript of the recording of this Talking Heads podcast

Daniel Morris: Hello and welcome to the BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis through the lens of sustainability on the topics that really matter to investors. In this episode, we’ll be discussing climate-focused investment strategies. I’m Daniel Morris, Chief Market Strategist, and I’m joined by Martina Jung, Portfolio Manager for European Equities. Welcome, Martina, and thanks for joining me.

Martina Jung: Hello, Daniel. Thank you very much, great to be here.

DM: In recent years, investors have been increasingly looking at thematic investing to find better-than-benchmark returns, but also something that can have a positive impact on the planet. This is where climate-focused investment strategies come into play. One key driver of the increased awareness around climate was the Paris Agreement eight years ago. Could you update us on what’s happened since then and the importance of those developments for investors?

MJ: The Paris Agreement on climate change highlighted the urgency of limiting global warming to 2.0 or even 1.5 degrees above pre-industrial levels. Since then, many measures involving governments, companies and financial markets have been put in place to reduce greenhouse gas emissions and decarbonise the [global] economy.

For example, in 2019, the European Union committed to reaching carbon neutrality by 2050, meaning it wants to achieve net zero greenhouse gas emissions by removing as much CO2 from the atmosphere as is released into it. The EU then introduced the Paris-Aligned Benchmarks – tools that are part of a framework to encourage sustainable investment to help investors construct portfolios in line with the transition to a low carbon economy.

Finally, the latest Markets in Financial Instruments Directive came into force last year for banks and investment firms regarding the integration of sustainability into their investor suitability assessment and product governance. Under this framework, financial advisors and distributors have to ask clients to specify their sustainability preferences, according to which they must structure and offer products.

DM: What has BNP Paribas Asset Management done in this respect?

MJ: We have been developing our own net zero strategy. We signed up to the Net-Zero Asset Managers Initiative and published our net zero roadmap. We have developed a range of investment solutions that integrate environmental, social and governance (ESG) criteria. And one of the solutions that we believe specifically contributes to our net zero objective is our climate-aligned investment strategy.

DM: What exactly is that strategy, and why should clients invest in a portfolio aligned with the Paris Agreement objectives?

MJ: Our climate-aligned investment strategy integrates the fight against global warming into the investment process. It is about investing in European companies whose decarbonisation strategy is aligned with the Paris Agreement objectives.

To identify eligible companies, we have developed a proprietary climate alignment assessment methodology. This first assesses each company’s climate credentials. If a company is not disclosing its carbon emissions and has no emissions reduction targets, it is excluded from our investment universe. Companies that do disclose data and that have set climate targets will go through to our evaluation of climate performance. For this, we first check if a company is in a sector for which institutions such as the International Energy Agency have defined a specific decarbonisation pathway. If so, we assess whether the company’s strategy is aligned with this pathway.

For companies in a sector with no such pathway such as healthcare we assess whether its decarbonisation plans are aligned with the requirements of the United Nations Intergovernmental Panel on Climate Change.

Also essential to our climate assessment methodology is whether a company respects the EU’s Paris Aligned Benchmark standard. At the company analysis level, consideration of the PAB leads to the exclusion of all energy companies due to their exposure to carbon, oil & gas, for portfolio inclusion. We seek to ensure that the portfolio has a carbon footprint at least 50% below that of the benchmark at all times. On top of that, we work to reduce the carbon intensity of the portfolio by at least 7% a year. We also aim for a minimum exposure to sectors highly exposed to climate change issues. This has to be at least equal to that of the portfolio’s benchmark.

Such an approach enables us to exclude companies with the worst ESG performance and those that have more than 10% exposure to controversial activities, for example, alcohol or weapons. A company will only be selected for our climate-aligned portfolio if the required decarbonisation strategy and ESG credentials are accompanied by a sound financial profile.

We believe clients should invest in a portfolio aligned with the Paris Agreement objectives as it is an opportunity to invest in companies with a climate friendly strategy. In our view, such a portfolio can help to identify future risks, but it can also exploit the long-term opportunities that fighting climate change creates.

Finally, it allows investors to benefit from the strong support from regulators and policymakers in the fight against global warming.

DM: Martina, thank you very much for joining me.

MJ: Thank you very much, Daniel.


Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
Environmental, social and governance (ESG) investment risk: The lack of common or harmonised definitions and labels integrating ESG and sustainability criteria at EU level may result in different approaches by managers when setting ESG objectives. This also means that it may be difficult to compare strategies integrating ESG and sustainability criteria to the extent that the selection and weightings applied to select investments may be based on metrics that may share the same name but have different underlying meanings. In evaluating a security based on the ESG and sustainability criteria, the Investment Manager may also use data sources provided by external ESG research providers. Given the evolving nature of ESG, these data sources may for the time being be incomplete, inaccurate or unavailable. Applying responsible business conduct standards in the investment process may lead to the exclusion of securities of certain issuers. Consequently, (the Sub-Fund's) performance may at times be better or worse than the performance of relatable funds that do not apply such standards.

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