Northern Trust Asset Management’s new passive strategy aims to meet investors’ climate change and natural capital criteria.
Global investment manager Northern Trust Asset Management’s (NTAM) new World Natural Capital Paris-Aligned Strategy aims to help investors address critical environmental risks while maintaining broad market exposure “in a risk-controlled manner”.
The strategy integrates climate and natural capital considerations, combining alignment with the 1.5°C decarbonisation pathway, nature-aware tilts and screens, and Northern Trust Custom ESG exclusions, “acknowledging the intrinsic synergies in the twin crises” of climate change and biodiversity loss.
NTAM specialises in quantitative and sustainable investing, with the firm aiming for a “sweet spot” between the two to create solutions for clients. The new strategy grows the firm’s range of sustainable index investment solutions.
Julie Moret, Global Head of Sustainable Investing and Stewardship at NTAM, told ESG Investor that a key area of focus for the firm is delivering “efficient risk control solutions for investors so that they’re compensated for risks in all market conditions”.
The firm’s Natural Capital Paris-Aligned Strategy is benchmarked a passive index, which means it is able to “deliver solutions to clients within low tracking errors”, according to Moret.
The firm’s Sustainable Investment practice specialises in research data, proprietary tools, design of methodological frameworks for sustainable investment solutions, and its stewardship function.
Moret said that the strategy looks to offer an efficient and risk controlled means to provide exposure to investors who are looking for broad global market exposure in a risk-controlled manner [with] low tracking error, ensuring that there’s diversification around sectors and styles for clients that are looking for target exposure to both climate change and natural capital criteria.
“What we’re looking to solve for is those clients that are increasingly looking not just [at] your broad global market exposure, but in helping to identify companies that are really targeting both climate change and biodiversity loss, and how do we bring those solutions in that risk-controlled manner, so very aware of tracking error and diversification risk,” added Moret.
The strategy looks to “closely match the risk and return characteristics” of the MSCI World Natural Capital Paris-Aligned Equity Select Index – a customised index that screens companies linked to ecosystem loss and water pollution – and to those that are mis-aligned with UN SDGs 14 and 15, Life Below Water and Life on Land.
NTAM will apply what it calls the “Paris-aligned benchmark overlay” and identify securities within the parent index that meet the 1.5°C decarbonisation pathway, achieving a reduction of 50% relative to its starting carbon emissions to be Paris benchmark aligned, and ensuring that on an annual basis the index has a minimum carbon emissions reduction of 7%.
The strategy also includes natural capital tilts for companies that have exposure to green revenue, with firms deriving 20% or more in terms of green revenue getting a positive tilt within the index. The firm also applies custom screens to avoid exposure to companies in violations of the UN Global Compact.
“What we’re doing here is we’re identifying those broader interconnected environmental considerations, aside from just decarbonisation, which is parameters around water, water stress, biodiversity loss, pollution, toxic conditions and waste […] and screen out those companies that are being flagged as high controversy risk on certain products and certain conduct screens”, said Moret.
What makes NTAM’s new strategy particularly appealling is the combination of climate change and natural capital, Moret added, noting that while there is a big investor focus on decarbonisation, having solutions that tackle the “twin crises” of climate change and biodiversity loss is compelling.