Climate change and ESG. How can finance help society address climate change through investment

Wealth Management and Private Banking

17 March 2022

Client Data Managementclimate changeDataESGMeeting of MindsPortfoliosRiskWealth managementWealth Management and Private Banking

Expert: Vincent Denoiseux, Head of ETF Research and Solutions, Lyxor ETF, Amundi Group. Facilitator: Justin Hodges


  1. Climate is an emergency we want to address with the portfolio, but at the same time we have to optimise this for clients. These two goals can be aligned by relating the financial risk of a portfolio with the actual climate change impact
  2. One of the main tools for policing carbon emissions will be carbon pricing - using data to estimate what the burden will be for companies going forward with the increasing price of carbon emissions
  3. Identifying the carbon price risk premium involves using data to estimate the risk for companies should there be an increase in carbon price. While this is a complex process it is an important stress test scenario
  4. Knowing how much your emissions are worth will allow you to manage the increased financial burden on the financial statement to support the potential increase in carbon price
  5. Reducing the financial risk of a portfolio in line with the client’s impact requirement will also allow you to look at the performance as well as report on it

Context/discussion points:

  • We have seen this work well for wealth managers looking to publish their carbon emission scores relatively quickly but who don’t want it to detract from the benchmark
  • The 50% reduction in carbon intensity achieved through Paris Aligned Benchmarks (PABs) is really positive and allows them to look at this and make that commitment
  • The distribution of carbon emissions is massively skewed, so reducing emissions by 50% compared to the parent benchmark does not necessarily entail a massive amount of tracking error.
  • In practice, the index works because it knows which companies emit a lot and which ones don’t, so it is constantly being rebalanced to optimise for the tracking error and minimise it vis a vis the parent benchmark, while respecting all the constraints
  • If everyone needs to be net zero by 2050, this type of product is essentially implementing decisions that will have to be taken later, and by doing it early, it might be smarter as many of the impacts are far from fully priced by the market
  • Things change so while this is useful for the current environment is this not just a wrapper to say you have done what you are supposed to do for your client?
  • Energy stocks were the best performing sector in 2021 but this index outperformed the benchmark despite having no exposure to energy stocks
  • There will always be companies that will benefit in the short term but overall carbon pricing is rising in terms of base which is necessary so the larger the price, the higher the pressure on the price of carbon and the higher the pressure on companies
  • The process provides a suite of indices which are precisely underweighting the stocks which will be hit by this process
  • As the price of carbon goes up (e.g. increasing carbon tax), investors will somehow be exposed to companies without a low carbon substitute - and this could be detrimental to your returns.
  • Does the world need another index or should we just accept a performance that is different in the short-term when it comes to tracking?

Key Takeaways:

  • With all the providers in the market there is a lot of missing data and a lot of indexes are attributing scores based on those of adjacent industries and sectors because they know the data is missing - so the science is currently imperfect
  • There needs to be a set process on how the industry copes with the frameworks and standards that they will have to manage when it comes to climate
  • Carbon pricing is gaining importance but the carbon market is still an immature, complex and fragmented market. However, it is becoming crucial for governance and is putting pressure on companies. Modelling scenarios that look at the impact will become crucial