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Climate Impact Investing Is Coming On Fast

There is no denying the impact of climate change — and associated regulatory realities — on the business of investment management. For portfolio managers, it is essential to understand how to successfully adapt and prepare for what some call the “mother of all correlated risks”

 

 

There is no denying the impact of climate change — and associated regulatory realities — on the business of investment management. For portfolio managers, it is essential to understand how to successfully adapt and prepare for what some call the “mother of all correlated risks”. Here we expose — in three parts — what portfolio managers need to know when switching to a fully Paris Aligned Benchmark (PAB) portfolio from a current market-cap weighted (CWB) portfolio.

 

We start by putting both portfolios through a battery of historical and transitive stress tests representing past and current world events to see how each one performs under these scenarios. Our goal here is to identify what, if any, specific tail events may come with the decision to adopt a climate-aligned portfolio.

 

In other words, in doing the right thing for the environment today, are we exposing ourselves to possible downside risk costs tomorrow, as indicated by the rebalancing from the point of view of changes in sector allocations and style factor exposures?

 

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