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Jean-Maurice Ladure

Jean-Maurice Ladure

Executive Director, MSCI Research

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Personalizing Climate-Focused Wealth Management Portfolios

  • The growing focus by investors on climate change is leading wealth managers to personalize portfolios in ways that off-the-shelf model portfolios may not address.
  • A climate-first approach to portfolio construction combines equity and bond assets that broadly integrate climate and ESG considerations with holdings that reflect the specific climate and sustainability preferences of investors.
  • Advisers can use a climate-first approach to develop strategies that match the personal preferences of investors while maintaining their financial objectives and appetite for risk.

Wealth managers are increasingly aligning portfolios with their clients' objectives of cutting global carbon emissions and enabling sustainable technologies.1

While advisers can avail themselves of an array of model portfolios, the needs and preferences of investors who want their investments to help slow climate change or generate positive, measurable social impact may call for strategies that straddle standard offerings.

A climate-first approach to constructing wealth management portfolios aims to accommodate the variations in how investors express their sustainability commitments without significantly altering their financial objectives and tolerance for risk. Designing strategies to achieve such goals may require wealth managers to personalize portfolios in ways that traditional model portfolios alone may not address.

Illustrating a climate-first approach

Advisers can apply a climate-first approach consistently across client risk profiles, from cautious and balanced, to aggressive and equity-only. A model portfolio can draw on two components:

  • A core sleeve with a mix of equities and bonds that broadly integrates climate and ESG considerations.
  • An impact sleeve with a mix of assets that reflect the investor’s specific climate and green solutions preferences.

Imagine an investor with a balanced portfolio who allocates 60% to equities and 40% to bonds, and who decides to put money toward companies that have shown resiliency in both ESG and climate. An adviser can incorporate that preference into the client’s investment portfolio broadly, for instance, by moving away from an allocation based solely on market capitalization and allocating instead to a core sleeve divided equally between ESG and climate mandates.


Example of climate-first model portfolio construction

*Denotes four risk profiles times three ESG and climate intensities, as illustrated in the charts below. This is not intended as a recommendation for a particular allocation strategy.

Alternatively, the client might prefer a more aggressive approach, focusing the portfolio’s impact on climate and green solutions. In that case, the portfolio could invest 25% in an impact sleeve with such solutions and the remaining 75% in a core sleeve that tilts more strongly toward climate. The preference can be refined by its intensity, as measured by the weighting and composition of the core and impact sleeves.

The charts that follow compare the two underlying ESG and climate preferences to a market-capitalization reference for each of four risk profiles, using the performance of nine MSCI indexes from May 2014 to August 2021.2

Lower emissions, more impact

The climate-first approach cut the portfolio’s carbon footprint by as much as 40%, depending on the client’s preference and its intensity. A balanced mandate with a core allocation for ESG and climate, for instance, lowered the portfolio’s greenhouse gas emissions by 35%.


Comparing the carbon footprint of a climate-first portfolio for four risk profiles

Data as of August 2021.

Adopting a more aggressive approach focused on climate through a mix of core and impact sleeves did not change the carbon footprint significantly. As the following exhibit shows, however, the change nearly doubled the amount of revenue portfolio companies earned from renewable energy, electric cars and other businesses linked to a clean-energy economy. The change quadrupled such revenues compared with a market-capitalization-only portfolio.


Comparing revenues from clean energy

Data as of August 2021.


Resilience to ESG risks

The integration of ESG in the core sleeve led the climate-first model portfolios to achieve significant improvements in resilience to long-term ESG risks, as measured by the improvement in both ESG scores and ratings (to AA from A) across each of the risk profiles.


Comparing resilience to ESG risks

Data as of August 2021.

Note that portfolio ESG ratings ticked down slightly when the portfolios boosted the allocation to climate and green impact solutions during our study period. That reflects a trade-off between allocating to companies that earn a significant share of green revenue compared with those that have high overall ESG ratings.

Financial performance

The climate-first portfolios improved sustainability significantly, without taking on more risk or surrendering performance meaningfully during our study period. As the chart below shows, a 60/40 portfolio combined with an ESG and climate core preference outperformed its market-cap-weighted benchmark by 45 basis points (bps) per year, with less risk, during the period of illustration.3


Comparing risk-adjusted returns

Based on the performance of the MSCI USD IG Corporate Bond Index, MSCI ESG Leaders Corporate Bond Index, MSCI Climate Change Corporate Bond Index, MSCI ACWI Index, MSCI ACWI ESG Leaders Index, MSCI ACWI Climate Change Index, MSCI ACWI IMI Smart Cities Index, MSCI Global Energy Efficiency Index, and MSCI Global Green Building Index. Data as of August 2021.

Though the impact portfolio was slightly riskier, it outperformed the market-cap portfolio over the same period by an average of 130 bps across all risk profiles. The outperformance reflected the choice to reallocate capital to companies that earn the bulk of their revenue from alternative energy or other sustainable businesses and away from fossil-fuel businesses. The added risk reflected the concentration of capital in a smaller set of companies that derived significant shares of revenue from green revenues.

For both core and impact allocations, the portfolios achieved their improvements with tracking error of less than 0.9% and 2.2%, respectively. The risk profiles of both intensities remained in alignment with the hypothetical client’s starting point.

As clients seek to counter climate change and improve sustainability, managers may want more personalized approaches for constructing portfolios at their disposal. A climate-first approach can help wealth managers tailor strategies to match clients’ unique preferences.



1See e.g., Murray, Sarah. 2019. “Rich millennials push to put family wealth into impact investments.” Financial Times, Oct. 16, 2019.

2The analysis uses this time period, the longest for which data is available for all nine indexes it covers, for consistency across each of the hypothetical portfolios. The indexes are the MSCI USD IG Corporate Bond Index, MSCI USD IG ESG Leaders Corporate Bond Index, MSCI USD IG Climate Change Corporate Bond Index, MSCI ACWI Index, MSCI ACWI ESG Leaders Index, MSCI ACWI Climate Change Index, MSCI ACWI IMI Smart Cities Index, MSCI Global Energy Efficiency Index and MSCI Global Green Building Index.

3We note that this is a hypothetical scenario using historical data and that actual performance may differ significantly. Past performance is not indicative of future results.



Further Reading

Understanding MSCI ESG Indexes

Understanding MSCI Climate Indexes

Climate and Net-Zero Solutions from MSCI