Dr. Christian Vial
Head of Innovation & Research
Carbon exposure reduction of investment portfolios thought through to the end
Simple, flexible and cost-effective reduction of the carbon exposure of investment portfolios.
The objective of Finreon ZeroCarbon® is not only to reduce the carbon exposure 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 ZeroCarbon®. At the same time, climate risks can be substantially reduced and a contribution to a lower CO2 economy can be made.
The innovative Finreon ZeroCarbon® Hedge can be flexibly combined with various investment solutions. A neutralization of the carbon exposure of classic investment portfolios as well as improving existing sustainable investments through the Finreon ZeroCarbon® 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 exposure 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 exposure of a portfolio by overweighting low carbon stocks and underweighting high carbon stocks.
The patent pending Finreon ZeroCarbon® 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 ZeroCarbon® solution aims to neutralize the carbon exposure of investment portfolios with a CO2 hedge.
The innovative Finreon ZeroCarbon® CO2 hedge can be combined with various investment solutions. A neutralization of the carbon exposure of classic investment portfolios as well as improving existing sustainable investments through the Finreon ZeroCarbon® methodology are targeted.
As an innovative market-based solution targeting neutral carbon exposures, Finreon ZeroCarbon® makes it possible to efficiently adapt investment portfolios to the impact of climate change.
Targeting a CO2 neutralization: Finreon ZeroCarbon® aims not only to reduce the carbon exposure of portfolios with a market-based solution, but also to neutralize it.
Very low risks: Existing approaches to reduce the carbon exposure often lead to high tracking errors as exclusions increase, in particular when whole industries are excluded. The objective of Finreon ZeroCarbon® is a neutralization of the carbon exposure 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 ZeroCarbon® CO2 hedge is required to target a neutralization of the carbon exposure of the portfolio.
Comparable to a currency hedge to neutralize foreign currency exposure, the Finreon ZeroCarbon® hedge can similarly be used to target a neutralization of the carbon exposure.
Finreon ZeroCarbon® solutions
The objective of the Finreon ZeroCarbon® solutions is to neutralize the carbon exposure of different universes (e.g. Swiss equities, world equities or emerging markets equities) using Finreon ZeroCarbon®.
Finreon ZeroCarbon® Offset solutions
In addition, there is the possibility to neutralize the carbon exposure in individual portfolios with a building block with negative carbon exposure by adding the Finreon ZeroCarbon® Offset solution in a simple and efficient way.
Remarks regarding the Finreon ZeroCarbon® methodology
Finreon ZeroCarbon® solutions aim at optimizing, reducing or neutralizing a portfolio’s carbon exposure. The following definitions and assumptions are made throughout this marketing document:
Carbon exposure 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 exposure 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 exposure 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 exposure is targeted at the point of rebalancing and subject to market movements afterwards.
Finreon ZeroCarbon® 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 ZeroCarbon® 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 exposure.