Decarbonisation: a net zero blueprint for your whole portfolio

Ben Popatlal

Lesley-Ann Morgan

Although decarbonising an investment portfolio is a multi-faceted, multi-stage exercise, it needn’t be complicated.

Adding the dimension of sustainability – in this case, decarbonisation – to your portfolio construction process does not mean changing your approach entirely. We don’t need to re-write the book on portfolio construction to add this chapter on sustainability.

In this article, we share our method for decarbonising a portfolio which invests in multiple asset classes, building on Schroders’ three-part decarbonisation guide for asset owners (available upon request), published last year. We use this approach in our own Multi-Asset decarbonisation strategy at Schroders.

A portfolio cannot decarbonise in a vacuum

In any decarbonisation investment strategy, it is crucial to distinguish between the portfolio and the planet. It is easy to simply decarbonise the portfolio; we can do that through divestment. But by doing so, we would a) significantly compromise the investment integrity of the portfolio, which is an unacceptable trade-off, and b) we would have very little – or probably no – impact on real world decarbonisation. We believe it is necessary to articulate our approach to decarbonisation as a feedback loop between the portfolio and the planet. Figure 1 illustrates this feedback loop.

Figure 1: Our ability to decarbonise our portfolio depends in large part on the decarbonisation of the investment universe

Source: Schroders Multi-Asset, January 2024

As we pursue decarbonisation of the portfolio, it is necessary to be aware of the universe within which we operate. Maintaining a balanced and effective feedback loop is important for maintaining investment integrity as we augment the portfolio with a decarbonisation objective. Different strategy types within our portfolio can help us achieve this balance in different ways.

Many strategy types, one decarbonisation goal

There are many ways to classify investment strategy types. As we introduced decarbonisation into our investment equation, we felt it helpful to frame a new classification of strategy types.

Our own particular investment philosophy is to be unbiased with respect to underlying strategy type; in our multi-asset decarbonisation strategy we use whichever underlying strategies we need, in whichever proportions we feel appropriate, to deliver on our objectives. We try and choose the best tool for the right job at any given time. But even for asset owners that are inclined towards certain strategy types over others, the concepts we share below should be useful.

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