Home / Analysis / Carbon exposure halved in new Russell global shares plan

Russell Investments has targeted a 50 per cent carbon footprint shrinkage in a new global equities solution soon to be offered in the Australasian market. The reduction to that level will have little-to-no impact on the portfolio’s tracking error, Russell believes.

Alister van der Maas, Russell NZ chief, said the index-based strategy takes a multi-faceted approach in slashing carbon exposure by half and increasing tilts to ‘sustainable’ stocks without inducing excessive tracking error.

“We’re trying to get a standard index return with a radically-reduced exposure to carbon,” van der Maas said. The Russell decarbonisation strategy took a different angle than the New Zealand Superannuation Fund’s carbon-stripping process, announced last week, he said (see separate report below).

“NZ Super targets about a 20 per cent reduction in carbon exposure, we start at 50 per cent,” van der Maas said. “We have independently developed our own approach and research.”

A just-released paper authored by Russell NZ consultant, George Thomson, says the 50 per cent target provides “the most meaningful reduction without incurring significantly greater tracking error”.

“At reduction targets lower than 50%, tracking error is about the same, but it starts to increase significantly when trying to achieve more than 50% reduction,” the paper says.

According to the study, the Russell low-carbon global equities strategy – which will be benchmarked against the MSCI All Country index – has six objectives:

• Reduce carbon footprint by at least 50 per cent;
• Reduce exposure to stranded assets (fossil fuel reserves) by at least 50 per cent;
• Exclude companies with more than 20 per cent of revenue from coal-related activities (unless carbon capture and storage procedures are used);
• Invest in companies expected to contribute positively to the transition to renewable (‘green’) energy sources;
• Ensure the aggregate portfolio has positive bias towards companies with high environmental, social and governance (ESG) characteristics;
• Maintain tracking error of no more than 1 per cent.

As well as its in-house research, the new Russell strategy uses data supplied by Trucost, Sustainalytics and Axioma.

Van der Maas said the strategy would evolve over time as research and data on underlying corporate carbon exposure and ESG continued to improve.

“Russell has been thinking about how to do this for some time,” he said. “And like most of our strategies it has been sparked by client demand.”

He said while Russell has built bespoke carbon-reduction portfolios for institutional clients globally, the new strategy would be a pooled offer open to all wholesale clients in Australia and NZ.

– David Chaplin, Investment News NZ