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Think Carbon optimization
Trade-offs between risk, return and net zero carbon
Highlights
- Transitioning to a low-carbon economy – How can investors create net zero carbon portfolios? Institutional capital has a powerful role in supporting and accelerating the transition to a low-carbon economy, with many asset owners and managers, along with corporations and countries, setting net zero carbon targets.
- Trading off between risk, return and carbon intensity – The standard optimization model can be adapted to include the carbon intensity characteristics of different asset classes, allowing investors to optimize portfolios to across the three dimensions of risk, return and carbon.
- Investigating the solutions and benefits – Real assets can be a cost-effective way to decarbonize a portfolio, while also offering diversification, inflation hedging, yield and liability matching.
- Allocating to real assets – Results of optimization modelling demonstrate how realistic allocations to real assets in a traditional stock and bond portfolio can reduce the portfolio’s carbon emissions and achieve net zero targets.
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Sources: MSCI; FactSet; Nuveen Real Assets. Asset class risk and return represented by the following indices: U.S. fixed income: Bloomberg US Aggregate Index; Global fixed income: Bloomberg Global Aggregate ex-USD Total Return Index, value unhedged USD; U.S. equities: Russell 300 Index; Global equities: MSCI ACWI ex-US Index; Infrastructure: MSCI Private Global Infrastructure Index; Farmland: NCREIF Farmland Index; Timberland: NCREIF Timberland Index. All returns in USD. Carbon intensity estimates are sourced from MSCI for the following indices: U.S. fixed income: Bloomberg US Aggregate Index; Global fixed income: Bloomberg Global Aggregate ex-USD Total Return Index, value unhedged USD; U.S. equities: Russell 300 Index; Global equities: MSCI ACWI ex-US Index; Infrastructure: S&P Global Infrastructure NR USD; Nuveen internal estimates for Farmland and Timberland.
Past performance is no guarantee of future results.
Note: All carbon intensities include scope 1 and 2 emissions and exclude scope 3. Timberland and farmland emissions exclude farm and forest management activities which are considered scope 3. Timberland removals are representative of average annual change in forest carbon stock for a portfolio that includes a mix of sustainable forestry and improved forest management strategies. Improved forest management strategies exhibit significant net removals whereas sustainable forestry strategies feature stable carbon stocks and do not have any net removals. Removals for improved forest management strategies are calculated by converting verified carbon credits of Nuveen-managed/administered properties into an annual rate of change in forest carbon stock. These rates of removals are not perpetual and may change over time as volume growth cannot exceed rate of harvest (and/or decomposition) perpetually.
The risk-return characteristics of the timberland portfolio from which carbon intensities are estimated may not exhibit that of NCREIF Timberland Index which includes primarily sustainable forestry strategies. The risk-return characteristics of the farmland portfolio from which carbon intensities are estimated may not exhibit that of NCREIF Farmland Index. The risk-return characteristics of the S&P Global Infrastructure Index from which carbon intensities are calculated may not exhibit that of the MSCI Private Global Infrastructure Index.
Past performance is no guarantee of future results.
Note: All carbon intensities include scope 1 and 2 emissions and exclude scope 3. Timberland and farmland emissions exclude farm and forest management activities which are considered scope 3. Timberland removals are representative of average annual change in forest carbon stock for a portfolio that includes a mix of sustainable forestry and improved forest management strategies. Improved forest management strategies exhibit significant net removals whereas sustainable forestry strategies feature stable carbon stocks and do not have any net removals. Removals for improved forest management strategies are calculated by converting verified carbon credits of Nuveen-managed/administered properties into an annual rate of change in forest carbon stock. These rates of removals are not perpetual and may change over time as volume growth cannot exceed rate of harvest (and/or decomposition) perpetually.
The risk-return characteristics of the timberland portfolio from which carbon intensities are estimated may not exhibit that of NCREIF Timberland Index which includes primarily sustainable forestry strategies. The risk-return characteristics of the farmland portfolio from which carbon intensities are estimated may not exhibit that of NCREIF Farmland Index. The risk-return characteristics of the S&P Global Infrastructure Index from which carbon intensities are calculated may not exhibit that of the MSCI Private Global Infrastructure Index.
