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

Iancu works on the development of Fulcrum’s responsible investment capabilities. Prior to joining Fulcrum in 2021, Iancu was at Legal & General Investment Management where he led the stewardship team’s work in the energy sector and advised institutional clients on low-carbon investment solutions. Iancu graduated from the London School of Economics and holds degrees in philosophy and public policy.

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