Dr. Christian Vial
Head of Innovation & Research
Carbon footprint reduction of investment portfolios thought through to the end
Simple, flexible and cost-effective reduction of the carbon footprint of investment portfolios.
The objective of Finreon Carbon Focus® is not only to reduce the carbon footprint of portfolios with a market-based solution but to neutralize it.
On the one hand, investors can benefit from the opportunities offered by the transition to a CO2 neutral economy through Finreon Carbon Focus®. At the same time, climate risks can be substantially reduced and a contribution to a lower CO2 economy can be made.
The innovative Finreon Carbon Focus® Swap can be flexibly combined with various investment solutions. A neutralization of the carbon footprint of classic investment portfolios as well as improving existing sustainable investments through the Finreon Carbon Focus® methodology are targeted.
The mitigation of climate change and the transition to a CO2 neutral economy is one of the biggest challenges for the coming years. "Business-as-usual" is no longer an option. Climate change and numerous measures to contain it constitute a systemic risk. An integration of this risk is therefore becoming increasingly important as a fundamental component of holistic risk management in all industries.
Increasing social and regulatory pressure leads to the fact that the financial industry must also make its contribution. With a traditional equity portfolio (Global Equities), the economy is on a global warming path of ca. six degrees Celsius. To achieve the target of 1.5 degrees Celsius agreed in the Paris climate agreement, the measurement, disclosure and reduction of the carbon footprint of investment portfolios are becoming increasingly important.
Market-based approaches have prevailed – The development of sustainable investments (ESG) to date has shown that broad, market-based solutions have prevailed over concentrated, thematic approaches. Market-based approaches reduce the carbon footprint of a portfolio by overweighting low carbon stocks and underweighting high carbon stocks.
The patent pending Finreon Carbon Focus® solution follows reliably this approach: By negatively weighting securities with high CO2 emissions (High Carbon) and positively weighting securities with low CO2 emissions (Low Carbon), the Finreon Carbon Focus® solution aims to neutralize the carbon footprint of investment portfolios with a carbon swap.
The innovative Finreon Carbon Focus® carbon swap can be combined with various investment solutions. A neutralization of the carbon footprint of classic investment portfolios as well as improving existing sustainable investments through the Finreon Carbon Focus® methodology are targeted.
As an innovative market-based solution targeting neutral carbon footprint , Finreon Carbon Focus® makes it possible to efficiently adapt investment portfolios to the impact of climate change.
Targeting a carbon neutralization: Finreon Carbon Focus® aims not only to reduce the carbon footprint of portfolios with a market-based solution, but also to neutralize it.
Very low risks: Existing approaches to reduce the carbon footprint often lead to high tracking errors as exclusions increase, in particular when whole industries are excluded. The objective of Finreon Carbon Focus® is a neutralization of the carbon footprint with very little additional tracking error thanks to innovative portfolio construction.
Efficient mechanism: Due to the high degree of efficiency, only a very small allocation to the Finreon Carbon Focus® carbon swap is required to target a neutralization of the carbon footprint of the portfolio.
Comparable to a currency hedge to neutralize foreign currency footprint, the Finreon Carbon Focus® swap can similarly be used to target a neutralization of the carbon footprint.
Finreon Carbon Focus® Core solutions
Finreon Carbon Focus® Core building blocks with a neutral carbon footprint and a low tracking error can be used as core building blocks within the equity allocation. The solution is available on various universes (e.g. Swiss equities, world equities or emerging markets equities).
Finreon Carbon Focus® Extra solutions
In addition, there is the possibility to neutralize the carbon footprint in individual portfolios with a building block with negative carbon footprint by adding the Finreon Carbon Focus® Offset solution in a simple and efficient way.
Remarks regarding the Finreon Carbon Focus® methodology
Finreon Carbon Focus® solutions aim at optimizing, reducing or neutralizing a portfolio’s carbon footprint. The following definitions and assumptions are made throughout this marketing document:
The carbon footprint is defined as tCO2e / $m EV, where tCO2e are a company’s Scope 1 and 2 carbon emissions as reported by ISS ESG and EV is the company’s enterprise value.
The carbon footprint of portfolios is derived from the proportional attribution of the greenhouse gas emissions caused by the underlying portfolio companies. The allocation is made according to the respective weighting in the investors' portfolio. The carbon footprint of portfolios therefore does not reflect the investor's physical CO2 emissions, but rather the investor's exposure to the CO2 emissions caused by the underlying portfolio companies.
The optimization, reduction or neutralization of the carbon footprint is targeted at the point of rebalancing and subject to market movements afterwards.
Finreon Carbon Focus® is not a physical CO2 compensation and not an impact investment. Investor influence on company decision making is not to be mistaken with real world impact. Unlike impact investments, Finreon Carbon Focus® is a concept based on public market instruments and aims to optimize a portfolio’s carbon related risk/return profile and to target an influence on companies through non-market and market signals.
Derivatives (such as total return swaps or futures) are used as technical portfolio management tools, for hedging purposes, or as an additional source of return. The underlying assets are evaluated similarly to a direct investment into such assets, in particular with respect to their carbon footprint.