More than ever, investors recognize the risks and opportunities associated with the low carbon transition and are incorporating a wider set of considerations, including carbon, green revenues and environmental, social and governance (ESG) assessments issues into their decision making.
It is no longer sufficient to merely improve upon a set of sustainable investment (SI) characteristics compared to a benchmark, but rather that those improvements should achieve precise outcomes. Moreover, the desire to simultaneously control other index outcomes, such as tracking error, country/industry weights and style exposures, provides additional complications. The ability to achieve such specific requirements in an index ultimately rests with portfolio construction.
This paper shows how:
- multiple SI objectives can be incorporated in an index in a transparent and flexible manner.
- the Target Exposure methodology is an evolution of FTSE Russell’s tilting methodology, which fits well with the increasing demand for index solutions that incorporate precise Low Carbon and ESG outcomes.
- precisely targeted SI solutions can also be designed for ease of implementation and limited levels of tracking error.
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