VIEWS & RESEARCH

Thought Leadership

The tracking error error: why climate alignment calls for bolder steps

21 February 2022

Authors: Rahil Ram, Iancu Daramus

If climate change represents a major investment risk, should investors seek minimal deviations from a misaligned market? We explore the trade-offs between tracking error, forward and backward-looking climate metrics in the context of portfolio alignment.

Executive Summary

  • Investors who believe climate risks are significant and systemic should not aspire to doggedly track a misaligned market.
  • With simplicity at their heart, win-win approaches that keep both carbon and tracking error low at an aggregate level can be misleading upon closer inspection.
  • Investors wanting the highest impact should put climate science at the heart of portfolio construction and allocate. capital to companies, across all sectors, that are on target to reduce emissions in line with science-based emission pathways.
  • With data and analytics fast improving, tools such as climate alignment can help investors bring climate modelling to the heart of portfolio construction.
  • The transition will not be linear. An active approach can allow investors more freedom to engage with and distinguish between companies that are already part of the solution, those that are credibly transitioning, and those that risk becoming obsolete.

For the full White Paper, please click below.

About the Authors

Rahil Ram

Rahil is a Director at Fulcrum Asset Management and is involved in portfolio strategy, portfolio implementation, research, sustainability and idea generation for the discretionary macro and thematic strategies. Prior to joining Fulcrum, Rahil was a strategist within the Asset Allocation team at Legal & General Investment Management for five years, during which time he completed his Masters’ in Actuarial Management from Cass Business School and qualified as an Actuary in 2017.

Iancu Daramus

This content is provided for informational purposes and is directed at professional clients as defined in Directive 2011/61/EU (AIFMD) and Directive 2014/65/EU (MiFID II) Annex II Section I or Section II or an investor with an equivalent status as defined by your local jurisdiction.  Fulcrum Asset Management LLP (“Fulcrum”) does not produce independent Investment Research and any content disseminated is not prepared in accordance with legal requirements designed to promote the independence of investment research and as such should be deemed as marketing communications.  This document is also considered to be a minor non-monetary (‘MNMB’) benefit under Directive 2014/65/EU on Markets in Financial Instruments Directive (‘MiFID II’) which transposed into UK domestic law under the Financial Services and Markets Act 2000 (as amended). Fulcrum defines MNMBs as documentation relating to a financial instrument or an investment service which is generic in nature and may be simultaneously made available to any investment firm wishing to receive it or to the general public. The following information may have been disseminated in conferences, seminars and other training events on the benefits and features of a specific financial instrument or an investment service provided by Fulcrum.Any views and opinions expressed are for informational and/or similarly educational purposes only and are a reflection of the author’s best judgment, based upon information available at the time obtained from sources believed to be reliable and providing information in good faith, but no responsibility is accepted for any errors or omissions. Charts and graphs provided herein are for illustrative purposes only. The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Some of the statements may be forward-looking statements or statements of future expectations based on the currently available information. Accordingly, such statements are subject to risks and uncertainties. For example, factors such as the development of macroeconomic conditions, future market conditions, unusual catastrophic loss events, changes in the capital markets and other circumstances may cause the actual events or results to be materially different from those anticipated by such statements. In no case whatsoever will Fulcrum be liable to anyone for any decision made or action taken in conjunction with the information and/or statements in this press release or for any related damages. Reproduction of this material in whole or in part is strictly prohibited without prior written permission of Fulcrum Copyright © Fulcrum Asset Management LLP 2024. All rights reserved.

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