Climate change investment risk: Update on the “Smart Carbon” methodology

Last year, Impax developed a new approach to managing climate change investment risk within equity portfolios, exploring the potential impairment to future cash flows of companies whose valuations are linked to fossil fuel assets (i.e. extractors of coal, oil and gas).

We have been running three model portfolios based on MSCI World, which reduce E&P exposure to varying degrees, and in order to preserve energy price (factor) exposure, replace it with Energy Efficiency stocks. The models have been rebalanced four times over the past year in response to MSCI index weightings and updates to our proprietary fossil fuel risk analysis.