A “decarbonising portfolio” reduces its exposure to carbon risk and aligns with a low-carbon future. Yet, according to Credit Suisse, it is equally important that such a portfolio proactively contributes to decarbonising the economy; that it helps fund the solutions required to address the global climate challenge.
The Swiss bank’s The decarbonizing portfolio — A sustainable investment strategy for a low-carbon future aims to guide investors into building a portfolio that capitalises on the different opportunities linked to climate change while moving away from unsustainable assets. The paper lists the ways to assess the climate preparedness of a portfolio and to define a systematic process for investors to manage the climate transition risks and make the most of its opportunities.
Making portfolios climate transition ready
Sustainable AUM in Credit Suisse Private Banking Asia Pacific has experienced “robust growth” in the last two years with a “significant pick-up” since the start of 2021, Benjamin Cavalli, head of private banking South Asia, Credit Suisse Private Banking Asia Pacific and APAC sustainability leader, said in a press release.
“This demonstrates that sustainability is not only becoming increasingly important to our clients, but that ESG-related products and solutions are now a key and integral part of our offering,” Cavalli said.
Sustainable investments have more than doubled in value over the last five years to around US$40 trillion, according to the Global Sustainable Investment Alliance (GSIA). Impact investing, meanwhile, has grown more than eight fold over the same period to US$715 billion, due to changes in consumer behaviour, public policy sentiment and social trends, as well as demand from clients and increased supply of product from fund managers, Credit Suisse said, quoting figures from GSIA.
“A major initiative for us now in Asia Pacific — and of course globally — is how we can work with clients closely together to move their portfolios to be climate transition ready, and offer them more products and solutions which capture the broad climate change theme for them to decarbonise their portfolio,” said Cavalli.
Last year, Andrew Lee at larger rival UBS told Asian Private Banker that there was significant momentum around investor interest in the adoption of sustainable investments, and on climate issues in particular. This interest has been consistent among investors in all regions, said the global head of sustainable and impact investing at UBS.
Mitigation and adaption
The integration of the advisory process into Credit Suisse’s investment strategies will create performance benefits, positioning the Swiss bank to generate “attractive investment returns” over the long term, Cavalli opined. Clients, including the next generation, are seeking more innovative solutions in this respect, he added.
Credit Suisse suggests using carbon footprinting and forward-looking transition methodologies to assess the degree to which a portfolio is aligned with a future of Earth’s temperature rising to within 1.5°C-2°C. While doing this, clients would want to swap out laggard companies with more climate-aligned companies, it added.
Fund managers may be better off assessing to what extent they integrate climate transition into their fundamental analysis, and how they could outperform (a benchmark) based on material risk and opportunity, Credit Suisse said.
Investment managers could, say, swap out traditional strategies to those that integrate material climate factors into an investment process, the bank said.
Also, investment managers could use a percentage of their portfolio allocation to explore investment opportunities that prioritise solutions that address global warming and mitigate climate change — such as green hydrogen or cheaper batteries.
“Many fund managers [offer] clients exposure to the latest climate technologies and innovations, as well as infrastructure investments and climate-aligned leaders within traditional industries.”
In addition to investing in mitigating the worst effects of climate change, investors must ensure that they support the poorest communities in adapting to climate change. This can be through investments into health, education, access to finance, agricultural productivity and water and other adaptation infrastructure that can help manage the effects of climate change and ensure these communities are more resilient.