Highlights

• Using S&P Global's ClariFI, investors can optimize their portfolios to passively mimic benchmark characteristics, while tilting their portfolio's holdings to reduce their overall carbon footprint ("creating greener portfolios").
• Using carbon scope 1+2 as a secondary constraint in the optimization process, the weighted S&P 500, MSCI EAFE and MSCI World's carbon intensity reduced by 30.4%, 39.3% and 35.2% on average during the period.
• The carbon reduction strategy maintains the underlying benchmark's risk & return characteristics and closely tracks the benchmark with a low tracking error. The lower carbon portfolios also have better climate characteristics than their benchmarks.

Motivations and Consideration of ESG Investing

The 2016 Paris Agreement committed to net-zero emissions globally by the second half of this century to keep the rise in mean temperatures well below 2 degrees Celsius above pre-industrial levels and to limit global warming to 1.5 degrees. To date, progress has been worryingly slow. Research by S&P Global Trucost shows that major global companies are on track for >3°C warming, falling 72% short of the required emissions reductions needed at this stage. The recent explosion of net-zero commitments from companies, financial institutions, and countries provides welcome optimism. By overweighting/underweighting low/high carbon companies, we illustrate how Portfolio Managers can reduce the overall carbon footprint of their portfolio whilst maintaining underlying risk & return characteristics utilizing S&P Global's ClariFI.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.