What are the Approaches to Building Carbon-Neutral Financial Portfolios?

Gone are the days when investors only used financial factors for research and investment purposes. Before investing their money, investors refer to several non-financial factors to determine risks. Collectively, these non-financial factors used for investment research are called environmental, social, and governance (ESG) factors. In 2022, investment banks and asset managers are trying to build a carbon-neutral portfolio, as they have better chances of growth. Many venture capital firms are investing into ESG research to explore more rewarding investment opportunities. Read on to learn how to build a perfect carbon-neutral financial portfolio in 2022.

Understanding carbon neutrality

Before exploring ways to build a carbon-neutral portfolio, it is vital to have a clear understanding of what carbon neutrality is. Carbon neutrality is a term used to describe a state of net-zero carbon dioxide emissions in the environment. When a business balances the amount of carbon taken out from the environment with the amount released, carbon neutrality is achieved. Generally, businesses achieve carbon neutrality through carbon offsetting. The term carbon neutrality is used for carbon dioxide emissions but can incorporate other greenhouse gases as well. Investors generally use climate-neutral, a broader term that includes all greenhouse gases.

If you are wondering why investors need to understand carbon neutrality, ESG research is an integral part of the investment industry in the 21st century. It is the responsibility of every business to become carbon neutral and contribute to a better environment. Moreover, many compliance laws require businesses to control their carbon emissions. A carbon-neutral business is more sustainable than any other business. A business that contributes to improving the environment is called an eco-conscious business. Investors prefer to invest in entities that are carbon-neutral and sustainable. It gives investors good returns for an extended period, as the asset is sustainable.

Investors rely on ESG services to know a business’ carbon neutrality. Usually, investors and organisations rely on third-party research providers to learn about suitable investments. The third-party service providers offer deep-dive research into investment opportunities aligned with the UN’s Sustainable Development Goals (SDGs). Apart from analysing the impact of any entity on the environment, researchers also identify the risk factors, expected return and growth chances. In 2022, investors should focus on building a carbon-neutral portfolio. A carbon-neutral portfolio is the new trend and will offer higher returns in the future.

Approaches for building a carbon-neutral portfolio

The financial industry is searching for metrics that can be used to set climate targets in 2022. The collective purpose of financial institutions should be to align their portfolios with climate targets. The steps to build a carbon-neutral financial portfolio are listed below:

  • The first step is to acknowledge the global climate issues and make a pledge to build a carbon-neutral portfolio. Finance institutions use the concept of financed emissions to understand their role in the betterment of the environment.
  • Before investing in or lending to any entity, institutions/investors must conduct due diligence to know about their carbon emissions. A part of the carbon emissions made by the target company will be counted on behalf of the finance institutions. This is the concept of financed emissions used by finance institutions before insuring, lending or investing.
  • Based on the financed emissions, a financial institution must decide the climate goals. Then, based on the climate goals, a net-zero carbon strategy is formed.
  • After determining the portfolio-level carbon, a definite decarbonisation strategy is formed. Financed emissions is a metric that only explains the total carbon emissions. Organisations and asset managers should also take steps towards decarbonisation and achieving a carbon-neutral portfolio.
  • Investors should also depend on ESG research to collect info about the latest trends and stats. With portfolio alignment tools and ESG reports, a financial institution can build a carbon-neutral portfolio.

Conducting climate research in 2022

A financial organisation can spend funds to train and hire ESG experts. However, hiring in-house ESG experts requires additional funds and time. It is better to outsource your ESG research requirements to a third party so you cna focus on your financial goals. A reputed research firm can offer SDG and sustainable finance solutions. From database preparation to report writing, everything can be taken care of by a reliable third party. Start building a carbon-neutral financial portfolio now! 

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