Invesco’s multi-factor strategy helps manage climate risk in investment portfolios

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Zainab Kufaishi
Zainab Kufaishi

DUBAI — Sustainability and responsibility in investments have become a mainstream strategy among professional investors across the globe. At the end of 2018, more than U$30 trillion in assets under management, representing about 30% of professionally managed assets, were held within responsible investment strategies according to a biennial report from the Global Sustainable Investment Alliance.

The growing concern about climate change and environmental protection have emerged as a leading issue for investors, driving much of this investment. Invesco’s recent annual survey of sovereign asset managers (IGSAMS), revealed that 83% of central banks and sovereigns globally believe immediate action is required to combat climate change, which is increasingly being translated into investment strategies that embed climate-related risk into the wider investment process.

In the survey, Middle East investors in particular highlighted concerns around climate-based risks such as changes in oil demand, rising temperatures and water supply. While several governments and regulators in the region have launched nationwide sustainability initiatives addressing climate change, environmental considerations have also increased in relevance for investment strategies.

Georg Elsaesser, senior portfolio manager, Invesco Quantitative Strategies, said: “ESG considerations have become an integral part of our standard multi-factor process for all investment portfolios. Integrating ESG considerations with our multi-factor approach allows flexible implementation of customized ESG criteria into the investment process while preserving the potential for outperformance.”

Instead of implementing traditional ESG exclusion criteria such as negative screening at the activity level or product level, Invesco combines a multi-factor approach building on quality, momentum and value factors with specific ESG characteristics.

“We have seen a rising demand among investors for more customized solutions that aim at improving a portfolio’s ESG characteristics, such as its carbon footprint,” said Elsaesser. “We have therefore created tailored ESG solutions that target a superior investment experience for clients without sacrificing factor exposures.”

Invesco’s bespoke solutions maintain exposure to the quality, momentum and value factors, given that these are the major drivers of portfolio risk and return. ESG criterion are then studied and selected based on the objectives the client is looking to achieve, such as reducing overall carbon emissions to a certain level in an existing portfolio. Stocks with negative ESG scores, relating to high carbon intensity in this case, would be replaced by alternative stocks that exhibit more positive ESG characteristics.

While carbon reduction targets could be achieved by divesting from certain sectors, such actions could jeopardize the characteristics and risk profile of the incumbent strategy. Incorporating the bespoke low carbon characteristics with the existing multi-factor strategy preserves the desired portfolio optimization while meeting the new ESG criteria.

Zainab Kufaishi, head of Middle East and Africa at Invesco said: “Sovereign investors are driving attention to core investment themes that have impact on sustainability and long-termism in the region, in particular climate change. These investors are looking to shift from simply avoiding controversial investments to a more impactful ESG implementation in their investment process. Customized solutions which amplify the positive notion of ESG are becoming more important.” — SG


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