Over the past years, sustainability considerations have permeated the investing space. While traditionally utilised for risk reduction, ESG investing has evolved to not only consider exclusion-based approaches but covers many different areas of sustainability and strategies to translate these into portfolio construction. As almost 90% of global emissions are covered under net zero targets, also a growing number of investors wish to specifically focus on climate in their investments.
Over the last three years, this development was underscored by significant inflows in climate-related ETFs as they received a quarter of overall ESG UCITS inflows.
Investors may have many motives to turn to ESG and specifically climate investing, among which risk, regulation and the rise of investor-specific climate targets may be the most salient ones. The risk reduction argument has been broadened to include physical or transition risk arising from companies’ (poor) management of climate risks. Regulatory requirements have for the first time provided clarity on specific investments – with the delegated act on Paris-aligned (PAB) and Climate Transition (CTB) Benchmarks, the European Union has provided a clear framework on what such benchmarks must achieve. Additionally, more and more institutional investors have specified decarbonisation targets for their invested assets, prescribing in turn that portfolios must guarantee a hard-wired carbon reduction path.
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