How ‘core’ equity strategies can meaningfully contribute to the climate transition

Australian equity strategies play a significant role in investors’ portfolios. ‘Core’ equity strategies typically have low tracking error relative to the benchmark, so there is a common perception that they are unable to contribute to investors’ efforts to decarbonise their investment portfolios without taking on significant tracking error risk, particularly within the construct of the ASX listed equity benchmarks.

This perception is reinforced by the need for investment managers to generate performance in line with the Your Future, Your Super (YFYS) benchmarks. This constrains how managers can implement investment approaches to reduce carbon exposure.

We believe a solution lies in the use of systematic low active risk strategies that employ a combination of active corporate engagement and targeted use of modest tracking error budgets to achieve a meaningful reduction in carbon exposure.

Our experience managing low carbon portfolios for the past 10 years suggests that it is possible to successfully implement such strategies in pooled and separately managed investment vehicle structures that also meet the Your Super, Your Future requirements.