by Mamadou-Abou Sarr, Global Head of ESG, and Julia Kochetygova, Senior ESG Research Analyst

Investors do not have to give up returns when hedging their portfolios against climate risks. Strategies to reduce investments in companies that produce carbon emissions or fossil fuels themselves, the culprit of climate change, can be optimized to avoid unintended risks and closely track benchmarks.

Free Option

The tracking error of optimized decarbonized indices versus conventional benchmarks can be very low, which allows seeing them as a “free option” on carbon. It means that if and when wider regulatory actions are taken on the way to mitigate climate change, the markets will re-price climate risks and such low-carbon strategies should start outperforming conventional benchmarks.

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