Your Net-Zero Strategy

Climate risk in equity and fixed income portfolios

clock 5 minute read


The potential impact of temperature rise on portfolio valuations depends on the assumptions made. For example, a hypothetical actively managed USD 100 million portfolio would have lost 7.75% (or USD 7.75 million) in a scenario that examined the potential impact on valuation of a 2°C temperature rise by 2100, coupled with an “aggressive” scenario for physical risk over a five-year period that ended Dec. 31, 2019. The potential decline for this “typical” actively managed portfolio divided between transition risk (-0.59%) and physical risk (-7.16%)

The impact of transition and physical climate risk on an actively managed equity portfolio

Assumes a portfolio of USD 100 million. Source: MSCI ESG Research LLC


Corporate-bond portfolios also face significant possible repricing in response to climate policies and emerging technologies designed to limit temperature rises. Managers can use optimization techniques to seek reduction of such risks.

In MSCI’s analysis, three hypothetical investment-grade corporate bond portfolios showed significant improvements in potential valuation versus benchmarks, based primarily on reducing exposures to the energy and utilities sectors and adding exposure to companies that may benefit from new low-carbon technologies. All three introduced relatively little tracking-error risk.

The analysis, which used point-in-time data as of Feb. 1, 2021, suggested that institutional investors may want to reevaluate their bond portfolios, based on government policies and investor-driven climate initiatives that could contribute to a rise in transition risk.

Improving the climate profile of bond portfolios

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Managing Climate Risk in Investment Portfolios: A Case Study. An analysis that shows how a manager of a global actively managed equity portfolio might measure and manage varying dimensions of climate risk (June 2020).

Climate Transition and Bonds: Risk or Opportunity. An analysis focused on the transition risk of investment-grade corporate-bond benchmarks and portfolios under a climate-policy scenario designed to limit the increase in global temperature to 1.5°C this century. (February 2021).

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