Including climate considerations within the investment process is a necessity but does not mean compromising portfolio returns, according to the BlackRock Investment Institute.
The institute's research indicated that climate-aware benchmarks could outperform competitor benchmarks, given the rapid changes in technology and regulation centred on climate change.
“Benchmarks that take climate into account have the potential to perform in line with or better than regular counterparts," the institute said.
“The MSCI Low Carbon Target Index, for example, has modestly outperformed the MSCI ACWI since 2010, MSCI data show."
The same is likely true for climate-proofed portfolios, the BlackRock Investment Institute added, and investors should make climate-proofing a “key consideration”.
The institute found that modifying existing benchmarks and “overweighting green companies and underweighting climate offenders” while keeping the returns profile close to that of the initial benchmark was one way to incorporate climate considerations and protect the portfolio.
Acknowledging that tracking error increased as the modified benchmark became more ‘climate friendly’, the institute nevertheless added that even small changes could have a huge impact.
“It is possible, for example, to cut a portfolio’s carbon footprint by around 70 per cent while keeping the tracking error within 0.3 per cent, our simulation showed,” the institute said.