This article is the second part of a research project on net-zero investment. While the previous publication was dedicated to the integrated approach, this one focuses on the core-satellite approach. As explained in the first part, net-zero policies need to address two dimensions: decarbonizing the portfolio and financing the transition. The integrated approach combines these two dimensions in an allocation process that considers both carbon intensity for the decarbonisation dimension and green intensity for the financing dimension. However, we have found that carbon intensity and green intensity are currently positively correlated. Therefore, we propose a second approach to better identify the contribution of the two net-zero dimensions. In the core-satellite strategy, the decarbonization dimension is managed within the core portfolio, while the objective of the satellite strategy is to finance the transition to a low-carbon economy.
The choice of the decarbonization policy is an important step in the design of the core portfolio. At least, three issues need to be considered: the magnitude of the decarbonization pathway, the sequence of decarbonization, and the selfdecarbonization property of the core portfolio. Moreover, a decarbonization pathway is not neutral if we refer to a strategic asset allocation process. In fact, it is equivalent to changing the implied risk premia derived from the BlackLitterman model. Building the satellite portfolio is certainly the most challenging part of the allocation process. It requires a deeper understanding of how to achieve net-zero emissions by 2050, specifically how to transform the current global value chain into a net-zero economy? As there is a gap in the current funding requirements, we need to prioritize financial investments and narrow the definition of the eligible investment universe. As a result, the investment processes of the core and satellite portfolios are very different.
The core portfolio is more of a top-down allocation process and exclusion strategy, where the central climate risk metric is carbon intensity. The satellite portfolio is more of a bottom-up allocation process and asset selection strategy, where the central climate risk metric is green intensity. Finally, the risk assessment of the global core-satellite portfolio must be addressed, such as the level of tracking error volatility relative to a conventional benchmark (e.g., the 60/40 constant mix strategy) or a traditional strategic asset allocation.
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