The beliefs that aligning with net-zero requires a high level of active risk, and that it is incompatible with active (factor) investing, are the two leading misconceptions held in the market today. Our latest research debunks these myths, demonstrating that investors can achieve alignment with their net-zero commitment without significant active risk and without compromising their return objectives.

Net Zero Doesn’t Necessarily Require High Active Risk

The first of these misconceptions is the most deeply entrenched of the two. This is understandable given that many net-zero strategies exhibit high levels of tracking error. This issue is often due to sub-optimal portfolio construction. For example, many climate-focused indexes are substantially underweight in sectors such as energy and utilities. If sector volatility is high (for instance, due to sensitivity to economic events), the tracking error may also be elevated.

To demonstrate the misconception that a net-zero commitment requires significant active risk, we analyzed the impact of a carbon intensity reduction on a portfolio’s active risk in the MSCI World Index universe. We calculated carbon intensity by dividing a company’s carbon emissions by enterprise value including cash.

Read the full ‘Sponsored Commentary’ now at the link below