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Net-Zero Carbon Investment Portfolio Alignment Harnessing the Power of Finance for Tackling Climate Change Before the Window Closes

with听Frederic Samama

Head of Strategic Development at Sustainable1, S&P Global

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Abstract

Although carbon neutrality is a buzzword in many industries and sectors of the world economy, there is still a debate on the meaning for the financial industry. In line with a science-based carbon budget framework defined by the Intergovernmental Panel on Climate Change (IPCC), this keynote presentation outlines a simple and robust methodology to align investment portfolios with maintaining a temperature rise below 1.5 C with 83% probability. We show how to keep the tracking error at a negligible level. This approach works for both passive and active investment managers. It also establishes an exit roadmap for carbon- intensive corporates, thereby generating a form of competition to decarbonize within the many social and economic industries and sectors. Four sources of risks are discussed: uncertainty around a rapidly shrinking carbon budget, time impacts on decarbonization rates, implementation risk due to market-wide selling pressure, and uncertainty about taxes on polluting companies. Being carbon neutral is then a budget that the planet can spend. If it is true for the planet, it could be true for the proxies of the planet (i.e., the economies) and the proxies of the proxies (i.e., the diversified portfolios). Then, being carbon neutral means to reduce by 12%/year the volumes of CO2 in 2022. For investors who would wait, it becomes -20%/year in 2025 and -47%/year in 2028. Although IPCC had always said 鈥渨e can tackle climate change, but the window is closing鈥�, for the first time a financial methodology integrates this

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