Climate Investing

6Active Paris-aligned Equity Investing

In this chapter, we develop a systematic equity strategy that can attain the climate goals of the Paris Agreement and incorporates climate-related alpha signals. We obtain immediate 50% relative and 7% year-on-year decarbonizations to achieve net zero by 2050 while maintaining minimum exposures to all sectors along with certain required exclusions. An important part of the portfolio is the incorporation of climate-related alpha signals: corporate target setting, carbon resource efficiency and green patents. Compared to a world equity benchmark, the strategy obtains an information ratio of 0.91 over the sample period from January 2013 to October 2021.

6.1. Introduction

Scientists predict “irreversible damage” to our planet from climate change if carbon emissions due to human activities are not significantly reduced¹. But time is limited, with the best chances of stopping the devastation caused from climate change being an immediate significant reduction of global emissions and aiming for net zero by 2050 – the same level of carbon emissions as 1850–1900 before widescale industrialization. International treaties signed by governments across the globe collectively aim to achieve those goals. The most important of those treaties is the 2015 Paris Agreement, which is an international treaty on climate change with the objective of limiting global warming to well below 2°C, preferably to 1.5°C, by the end of the 21st century².

The Paris Agreement ...