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Portfolio Climate Goal Setting: A Roadmap (Part I)

In today’s ARCUS, I share with you Part I of our team’s internal debate on whether to, and how to set portfolio climate goals/ambitions/targets. Whether you are an asset owner managing your own investments or outsourcing to external managers, some basic questions we answered in our debate below should also help you set your portfolio climate goals, if you wish to do so. In next month’s Part II, I will share our own portfolio climate goals and some of the tools we are using to monitor and realize them.

[1] * Based on portfolio positions and weights as of Mar. 2023.

** Calendar year emissions data and targets are reported in the subsequent financial year.

† S.M.A.R.T - Specific. Measurable. Attainable. Relevant. Time based.

‡ MSCI World Index Oct. 2021.

¶ IEA: The share of renewables in global electricity generation was 29% in 2020 (latest figures).

§ As at 2021, 2,253 companies across 70 countries and 15 industries had approved emissions reductions targets or commitments with the SBTi. The number of listed companies globally is from World Federation of Exchanges data.

|| EPA Greenhouse Gas Equivalencies Calculator.

# CDP climate change database.

After four years of deploying our Panvesting philosophy through our Global Panvest Fund (GPF), we believe our portfolio has credible environmental and climate credentials (shown above) [1]. So far these have been achieved without any boilerplate portfolio-wide climate goals. Instead, our unique philosophy, proprietary Resilience Framework and engagement with portfolio companies have delivered these credentials. However, as company climate reporting has evolved, certain climate metrics have become standardized and we have also engaged with best-in-class global climate change makers, we believe we are better positioned to understand the associated investment implications and value of portfolio climate goals. The fundamental debate can be summarized quite simply: Are portfolio-wide climate goals necessary, and can they be implemented without significantly changing an investment strategy’s risk-return outcome? As we sought to reach our own conclusion on this topic, we found that it raised a series of associated ‘sub-questions’ which needed to be considered, including the following: Portfolio Climate Goals – Why Bother? Why should investors adopt any climate goals in the first place? Some reasons that are being discussed include:

  1. To improve risk-return outcomes – comply with regulations/ provide competitive advantage

  2. To enhance the climate impact of the portfolio – being a good citizen

  3. Marketing stunt – AUM gathering by fund managers

We humbly suggest that the third reason seems to have been the main driver for many strategies to adopt climate goals. Many of these commitments that were made for AUM gathering are now being undone or reversed as they require back solving by investment teams with serious investment implications. We believe that the first two reasons, if deemed achievable and compatible by investment teams, lend support to having some portfolio climate goals. Are Risk-Return and Climate Impact Outcomes Mutually Exclusive? Our team concluded that they are not mutually exclusive. There are three reasons why:

  1. The 40,000 feet view (with long term implications) is that climate impact will need to be measured and disclosed to the underlying beneficiaries of assets. Asset owners, and therefore managers, will be moving from a risk-return to a risk-return-impact outcomes framework. This will see money flow towards climate positive companies.

  2. The helicopter view (with mid-term implications) is that laws, regulations, and accounting metrics will start to reflect a financial value associated with climate impact (both positive and negative), thus exhibiting causation between the climate credentials of a portfolio and its financial returns.

  3. At the ground level (now), companies through climate sensitive products and services are already differentiating themselves from their peers, thus impacting their financials.

Climate Investor vs. Climate Conscious Investor? To help develop meaningful goals which are consistent with our investment philosophy and strategy, we asked a simple question that tends to be ignored or avoided as many investors admirably want to play their part in solving climate change. We asked ourselves: Is our strategy a climate focused strategy or a climate conscious strategy? Climate focused investors call for their investments to deliver tangible avoidance or reduction of emissions, and/or support adaptation. Many asset owners and only a few fund strategies fall within this category. Whether underlying investments are listed or unlisted, such strategies have clear climate targets that will be achieved through intentionality, contribution and measurement, the more stringent pillars of delivering impact [2]. Our Global Panvest Fund follows the latter, i.e., a climate conscious strategy. This is embedded as part of our Panvesting philosophy which focuses on all forms of capital, including environmental capital, in our process. After lengthy and numerous discussions based on our Panvesting experience of the last four years, we see our climate conscious strategy is one that:

  1. Understands how portfolio companies affect the climate,

  2. Helps avoid climate harm,

  3. Harnesses opportunities to create positive climate externalities,

  4. Helps investees improve their climate actions, and

  5. Aims to deliver specific financial returns adjusted for carbon costs.

It is these outcomes that should therefore become the focus of any climate goals for our strategy and portfolio. More on our goals in Part II. Climate Goals vs. Climate Guardrails? Having established that there are good enough reasons to have portfolio climate goals, and that there are certain outcomes that our climate conscious strategy should deliver, the next obvious question is: What type of goals can we select from? The following are some examples of climate goals being used by investors and asset owners:

  • Net zero aligned – Imposing either IPCC [3], SBTi [4] or science-based carbon reduction trajectories upon a portfolio’s investments

  • Absolute carbon emissions reduction (from a baseline) – relevant for portfolios in transition and/or where an investor’s strategic ownership comes with the ability to direct carbon reduction actions

  • Global climate initiatives for the investment community [5] – NZAMi, NZAOA, PAII, etc.

  • EU SFDR [6] Article 8 and 9

  • Weighted Average Carbon Intensity (WACI) commitments

Limiting ourselves to fund managers, there seems to have been a race to select one of the many climate goals mentioned above. As commendable as the above-mentioned ambitions are, we realized that some of these goals came out of frameworks designed to enhance a strategy’s climate reporting standards. Therein lies a challenge. Using climate reporting standards as a proxy for a strategy’s climate goal is putting the cart before the horse. As an example, the EU’s SFDR Article 8 and 9 disclosure requirements and classifications on Funds has been claimed as a sustainability and, in some cases, climate goal by many strategies. But when the Article 8 and 9 reporting requirements were expanded under phase II in 2022, the investment teams could not back solve for the prescribed climate disclosures and realized the flaw in this goal setting approach. We concluded that portfolio goals, whether financial or climate related, must be a function of the investment process, not the other way around. This means that any climate goal(s) should actually be investing guardrails compatible with our investment philosophy and practically deployable in our process. These guardrails can and will influence the investable universe and even portfolio construction. We therefore decided to focus on the climate conscious investment guardrails and not limit our strategy to boilerplate climate reporting outcomes, as we will share later. Climate Capacity of the Team? One critical element that is underestimated, if not ignored by most investors when committing to portfolio climate goals and guardrails, is the importance of the investment team’s environmental and climate skills. Since the inception of our global equity strategy, our own environmental capital specialists have been instrumental in the designing of our process and Resilience Framework. Over the last four years, through engagement with companies on climate, the team has built up a much better understanding of the accuracy and reliability of climate data reported by companies. It is this data that will be needed for any decision making, monitoring, and reporting when it comes to implementing climate guardrails in the investment process. Our intensive, bottom-up engagement driven approach is not universally applied, however. For example, we have noticed a scramble by many investors after setting climate goals to find data providers that deliver portfolio climate credentials and analytics. But unless investment teams have the internal capacity to look under the hood of these data providers, and question the climate data with the investee companies, they won’t be able to put in place appropriate climate guardrails and could run the risk of being called out in the future for green washing.

Legacy vs. New Investment Strategy

Before I conclude Part I of our climate goal-setting journey, I must highlight to the reader the need to make a distinction between legacy versus new investment strategies when it comes to climate goals that will impact their overall portfolio climate outcomes. This is especially relevant for asset owners. Legacy strategies cannot genuinely repurpose themselves and impose portfolio-wide climate goals or investment guardrails overnight. Even a prolonged integration of any climate goals could severely change the risk-return outcomes of a legacy strategy. Moreover, such ‘strategy creep’ further risks the alienation and loss of legacy investors. We think that challenges like strategy creep can significantly limit the efficacy of climate goals for legacy investment strategies. On the other hand, new climate focused or even climate conscious strategies will have their climate guardrails embedded in their investment process. These strategies will also need to evolve as more climate facts become available, but at least they won’t face a strategy creep issue. Given the above-mentioned limitations that climate goals present for legacy strategies, asset owners will need to consider the addition of new investment strategies if they are to deliver on their own overall portfolio climate ambitions. Conclusion (Part I) Climate goals for portfolios are becoming “table stakes” for most asset owners and their ultimate beneficiaries. This does not mean that asset managers should blindly adopt climate goals that have short term marketing buzz. Instead, deploying well considered climate focused or conscious guardrails will provide a more impactful and permanent solution. Today, we shared with you a part of the debate that has helped us navigate this journey. Next month in Part II, we will share our own enhanced portfolio climate goals/guardrails and highlight some tools that we are using to monitor and deliver on them. Happy Panvesting, Munib Madni, Founding Panvestor

[2] Tideline - Truth in Climate Impact: A Tideline Guide to Best Impact Management and Labelling Practices [3] The Intergovernmental Panel on Climate Change (IPCC) [4] The Science Based Targets initiative (SBTi) [5] The Net Zero Asset Managers initiative (NZAMi), The UN-convened Net-Zero Asset Owner Alliance (NZAOA), IIGC’s Paris Aligned Investment Initiative (PAII) [6] The EU’s Sustainable Finance Disclosure Regulation (SFDR)


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