The election of Donald Trump may have been accompanied by significant media and political narrative around climate initiatives, but many institutional investors continue to assess the extent to which their portfolios are exposed to climate risk, or conversely, whether alpha opportunities exist in investing in companies providing solutions to climate risk.
Box 1 : Pension Funds push forward on climate goals despite backlash |
At a time of resistance to environmental, social and governance goals, pension funds have become a bulwark against efforts to sideline climate risks. In the past few months, some of the largest banks and asset managers in the United States have quit net zero networks, the climate groups that encourage their members to set ambitious carbon reduction targets and collaborate internationally on sustainability efforts. At a time of growing backlash to environmental, social and governance goals and investment strategies, pension funds, particularly in blue states and Europe, have emerged as a bulwark against efforts to sideline climate- related risks. The funds, which sit at the top of the investment chain, have stepped up engagement with asset managers and companies on climate goals and have kept public commitments to use their fiscal might to reduce carbon emissions. In some cases, that has meant shifting to European asset managers, which have not backed off on climate commitments as much as their American counterparts have. * New York Times. Published March 29, 2025. https://www.nytimes.com/2025/03/29/business/dealbook/pension-funds-clim… |
Concurrent with this has been a surge in demand for climate-related private market investments. The lure of the ‘illiquidity premium’ and a correlation differential to traditional asset classes is driving this and some of our peers (asset managers) continue to pivot their business models to private investments (credit, equity, infrastructure, etc.).
Private markets however come with many complex considerations (fees/costs, excessive valuations, tough exits, high levels of dry powder and drawn out calls on capital, etc.). At KBI, we continue to advocate for a public market approach to climate investing, given the diverse benefits offered to investors. A climate allocation in the public market space can improve diversification as well as introduce differential sources of return for pension funds. This is a fast and efficient way of aligning investment portfolios to the climate or sustainability goals (see Box 2) held by a large cohort of institutional investors, primarily public and large corporate pension funds.
Box 2 : The Public Market Diversification Dilemma |
A growing majority of large asset owners incorporate sustainable investment goals into their investment policies. Seven in 10 large asset owners (70%) now incorporate sustainable investment goals into their investment objectives, a seven-percentage-point increase since last year. Large asset owners with more than US$20 billion in AUM are more likely to incorporate sustainability goals, with 81% including them in their investment policies. Among smaller asset owners, 64% have incorporated sustainable investment goals. Large asset owners are still materially increasing their allocations to sustainable and impact-focused funds, even though the rate at which large asset owners are increasing their allocations has fallen year over year. In sustainable funds, 24% of large asset owners say they intend to increase their allocations over the next 12 months versus only 8% that intend to decrease allocations. Twenty-nine percent say they expect to increase their exposure to impact strategies versus only 1% that expect to decrease. European large asset owners are much more likely to invest, with 32% expecting to increase allocations, compared with 13% that expect to decrease theirs. * * Mercer Investment’s Large Asset Owner Barometer 2025, a survey covering 74 large asset owners, collectively $2trillion of assets, from more than 16 countries. |
Many investors have become increasingly concerned about concentration risk in their global equity portfolios in recent years. The objective of asset allocation is to balance risk and return by diversifying investments across different styles, strategies and assets. The ability to achieve diversification is challenging given the extent to which equity market cap indices have been dominated by a small cohort of Tech stocks in recent years. The same IT/Consumer Discretionary/Commercial Services stocks dominate the MSCI World Index, MSCI Quality Index, Growth Index and, at various times, Momentum Index.
As the tech stocks have low scope 1 & 2 carbon emissions, these names also dominate the Climate Change Indices. Yes, investors can lower their portfolio carbon emissions by increasing exposure to these names, but that comes with two caveats:
It increases concentration risk which runs contrary to improving diversification.
Most of these companies are not providing actual climate solutions.
That concentration risk will have worked well for investors in recent years. As a result, any ex-post analysis done today may well suggest that it is a good allocation decision to, for example, add exposure to a tracker of the MSCI World Climate Change Index. An ex-ante analysis may not be as positive. Either way, it runs counter to the concept of incorporating different sources of return into your portfolio.
Companies providing climate solutions have long-term tailwinds driving their business models. They are under analysed by the research community and hence offer more inefficiencies for active management to exploit. These companies are typically under-represented in market cap weighted indices and as a result, it is KBI’s conviction that an allocation can improve the overall risk-adjusted return profile of a portfolio.
Our approach at KBI
Twenty-five years ago, KBI, identified the world’s most critical resources being at the fore of climate-related impact, that is the nexus of food, water and energy. As our most critical resources, identifying companies providing solutions to these supply/demand imbalances seemed an opportune way to identify the potential winners. KBI’s Global Solutions Strategy allocates across this nexus and today offers investors exposure to multiple end-markets, many of which are at the forefront of climate mitigation, adaptation, resiliency and remediation. Not only does this provide an alpha opportunity, it also offers exposure to differentiated sources of return. The strategy provides diverse exposures across styles and market-cap, whilst being underweight mega-capitalised sections of the market.
KBI Global Solutions Case Study | |||
| What the strategy delivers |
| Balanced exposure to solution providers active in the areas of water, clean energy, energy efficiency and food. Also provides exposure to climate mitigation & adaptation, sustainability and impact. | |
| Client | Pension fund of global intergovernmental organisation | ||
| Mandate requirements | Climate impact allocation within global equity portfolio. Segregated mandate. Knowledge-sharing and customised screening on impact issues. | ||
| Benchmark | MSCI ACWI | ||
| Process | Multiple meetings leading to invitation-only extensive RFP. On site due diligence completed June 2024. | ||
| Other types of current searches where we see interest in GRS | – Global Thematic Equity for alpha generation purposes | ||
| Sample current institutional clients/ investors invested in GRS | – Sub advisory mandates for Canadian (Thematic Alpha) | ||
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* Diversification does not guarantee a proft or protect against a loss.
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