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Frontier looks at hedges against climate change
In the face of a surge of interest among institutional investors in the carbon management of their portfolios, asset consultancy Frontier has explored ways asset owners can take a top-down approach to carbon exposure to work with more obvious bottom-up strategies.
Most asset owners now actively manage their exposures to climate change risks within their portfolios. In particular, risks associated with the transition to a low or zero carbon economy and the resultant future carbon pricing and taxation regimes are increasingly coming in to focus from a risk perspective.
In a research paper released to clients, Frontier has looked at the carbon offset emission derivatives market and ways investors could use these instruments to reduce total portfolio exposure to higher carbon prices and mitigate against transition risks.
Used at the same time as more direct approaches, such as evaluating asset holdings on specific ESG criteria, Frontier researchers believe investors can effectively hedge some of their climate change risk.
James Bulfin, senior consultant at Frontier and the paper’s lead author, said: “Frontier has been advising clients on transitioning their portfolios to mitigate long-term climate change risks generally, for many years. However, there is now an increasing awareness of the issue of decarbonisation more specifically.
“Our research has explored ways investors can use carbon derivatives to complement the existing tools available to them to take a total portfolio approach to carbon exposure and manage climate change risks within their portfolio,” he said.
“Carbon derivatives are under-utilised in the institutional landscape today. And while there are some challenges, which we have explored in our analysis, we believe this is an area which has the potential to play an important future role in institutional investment portfolios and is worthwhile investors interested in carbon management getting their heads around.”
Frontier’s alternatives and derivatives research team examined a series of strategies investors could pursue to hedge carbon price risk but consider ongoing analysis and management of carbon exposures within portfolios should remain the bedrock of carbon exposure and transition assessment and management.
