A distinctive, differentiated equity allocation
For holders of global equity portfolios, it can be challenging to find investment strategies that offer something different in terms of portfolio composition and return profile.
Equity strategies focused on decarbonization – specifically, on the shares of companies whose products and services are in demand as the world tries to reduce carbon emissions – are a potential answer. We believe a decarbonization allocation can complement a core global equity portfolio, bringing diversification benefits and offering the potential for uncorrelated returns.
This paper explores the following characteristics of decarbonization from the perspective of an equity investor.
A focus on structural growth
We explain why a decarbonization allocation offers exposure to parts of the economy that are experiencing structural growth, which we expect to persist through the economic cycle.
A distinctive equity exposure
We explore how the decarbonization universe offers equity exposure distinct from a broad global equity allocation, and hence can result in a portfolio with a differentiated return profile.
A diversified and differentiated opportunity set
We describe where the decarbonization investment opportunities lie. While they span industries and market capitalizations, they can broadly be grouped into three ‘pathways’ to a low-carbon economy: renewable energy, electrification, and resource efficiency. We also view the decarbonization opportunity set through a regional lens, focusing on emerging markets, especially China.
For each decarbonization pathway, we consider:
- The primary drivers of structural growth.
- The key determinants of continued growth, in terms of policy, technological change, and consumer behavior.
- An example of a company within the pathway, and the investment rationale for holding it in a decarbonization portfolio. Our aim here is to highlight that, while decarbonization is a common tailwind for companies within the pathway, we favour an active, highly selective investment approach because the stock ‘story’ for an individual decarbonization-exposed company is usually idiosyncratic.
A distinctive return profile
We assess Global Environment’s historical return profile vs. quality, value, growth, and momentum factors, highlighting the diversifying role the strategy can play.
General risks. All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.
Specific risks. Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Derivatives: The use of derivatives is not intended to increase the overall level of risk. However, the use of derivatives may still lead to large changes in value and includes the potential for large financial loss. A counterparty to a derivative transaction may fail to meet its obligations which may also lead to a financial loss. Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company. Concentrated portfolio: The portfolio invests in a relatively small number of individual holdings. This may mean wider fluctuations in value than more broadly invested portfolios. Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems. Sustainable Strategies: Sustainable, impact or other sustainability-focused portfolios consider specific factors related to their strategies in assessing and selecting investments. As a result, they will exclude certain industries and companies that do not meet their criteria. This may result in their portfolios being substantially different from broader benchmarks or investment universes, which could in turn result in relative investment performance deviating significantly from the performance of the broader market.
