Building a Portfolio Through a Climate Impact Lens

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Abacus portfolios reflect our clients’ values without compromising traditional investment criteria. These values can focus broadly on Environmental, Social, and Governance (ESG) considerations (covering a wide range of impact themes and values), or they can focus narrowly on a specific set of values (climate change, social justice, LGBTQ+ rights, animal welfare, etc.).

Our previous posts cover what ESG investing is and what tools investors can leverage to create portfolios that consider ESG metrics. This article explores investing through a climate impact lens. 

Types of Screening

There are many types of public markets investing that use a climate or environmental impact lens. These portfolios leverage several tools, including negative screening, positive screening, and shareholder engagement. 

Negative Screening

Investors who want to specifically target climate or environmental impact often leverage negative screening, also known as exclusionary screening, when building portfolios. Negative screening excludes investments in companies that actively work against the investor’s values. With climate change, for example, this process omits investments from an investor’s portfolio in entities that have a negative impact on the environment. Typical screens include carbon intensity, fossil fuel reserves, deforestation, coal, and oil sands. 

Each manager may implement more or fewer screens, depending on its specific goals. Some strategies have a single mandate to manage its carbon footprint, while others aim to broadly invest in companies that holistically invest with climate change in mind.

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Positive Screening

Thematic portfolios targeting climate impact also leverage positive screening by investing in companies who are leaders in the climate space or provide novel solutions. Leaders are identified as companies that meet or beat certain climate metrics like net zero targets, tying executive compensation to environmental outcomes, or mapping the relationship of environmental issues to the company and reporting on the output. 

Simply put, this process identifies companies who actively contribute to environmental change. Companies that demonstrate having a positive impact are supported, while those that don’t meet the necessary requirements fail the screen. Essentially, positive screening can help an investor support practices they find impactful.

Companies that set targets and commitments to reduce climate emissions – with the ultimate goal of reaching net zero emissions (while reporting on the company’s progress) – creates increased transparency for investors. 

With regards to positive screening, it’s important to note that deep evaluation of a company and its related practices also plays a crucial role in understanding the real impact of a given metric. This is because some factors may be more central to a company’s operations than others. With the environmental impact example, financial companies may not have a significant carbon footprint, but they may lend capital to companies in the fossil fuel industry. This should be considered when assessing the environmental impacts of an investment manager or bank.

Shareholder Engagement

One of the primary resources an impact investor has in the public markets is engagement, or the process of how a shareholder can help move companies towards positive change.

Engagement practices are often targeted and can be shaped from the goals of an end investor – in this case towards driving positive environmental change and reducing the negative impact companies inflict upon the environment. 

For example, climate activists recently celebrated a win in electing three new board members to ExxonMobil’s board. This means it’s expected the company will lower its carbon footprint given the new board members have a knowledge of clean energy. 

More Ways to Create Positive Environmental Impact

Other ways shareholder engagement and activism can create positive change is by requesting increased climate-related reporting such as disclosing carbon emissions. 

Traditional investing factors should also be considered when building thematic impact portfolios in the public markets. At Abacus, this means avoiding active strategies and keeping an eye on exposure to small cap stocks, low valuation stocks, and highly profitable stocks. 

Asset allocation (the percentage of stocks vs bonds in a portfolio) is also relevant when investing thematically in public markets. Stocks are typically assessed by the ESG metrics of a given company while bonds may be assessed by the ESG metrics of the issuer, the use of bond proceeds, or a combination of both. 

Bond investors are able to target environmental impact by investing in Green Bonds which fund projects that directly contribute to specific solutions. Fixed income investors are able to leverage this tool as companies are required to share the underlying use of the proceeds for each bond. For example, a company may be raising funds to finance the installation of solar panels, which would lower the energy consumption of a company, thus effectively lowering a company’s carbon usage.

Mindfully Investing with an Impact Lens

Although investing through an environmental impact lens can sometimes seem complex, it is extremely doable, and there are many ways your values can align with how you navigate your portfolios. 

Reach out to an Abacus advisor today to learn more about using your portfolio to positively impact the planet.


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