Decarbonisation: a long-term investment view

Written By: David Palmer
Equity Portfolio Manager
Wellington Management

Explain the mandate you run for LGPS clients and how it has been tailored to meet their needs.
Global Opportunistic Value is a fundamental investment approach seeking to outperform the global equity market over a market cycle. We target companies that many investors overlook to take advantage of investor behaviour biases, such as overreactions to surprising short-term news that cause mispricing in the market.

We have tailored the mandate for LGPS clients by adding a net-zero-aligned decarbonisation glidepath. To implement this glidepath consistent with the investment objective, we employ:

  1. A bottom-up alignment target, which helps us identify companies with credible transition plans, including those in carbon-intensive sectors.
  2. Targeted engagement to improve alignment, consistent with our longer-term time horizon.

For us, portfolio decarbonisation is ideally an outcome, rather than a constraint and we believe our approach is closely aligned with our clients’ goal of encouraging real-world decarbonisation.

How do you balance investment objectives with net zero targets?
From our experience, the primary challenge most clients face is balancing decarbonisation ambitions with financial return objectives. To address this, we first aim to identify any potential trade-offs by analysing carbon data and attribution of the portfolio’s carbon footprint versus the opportunity set.

Second, we focus on forward-looking transition metrics and emphasise engagement where the outcome is expected to have a material impact on both investment returns and carbon emissions.

Third, defining robust guidelines is, in our view, key to set mandates up for success based on clients’ climate transition and financial objectives. It is important to review progress regularly and discuss how guidelines have influenced portfolio decision-making in practice.

Can you tell us a little more about the Transition Alignment Ratings?
Our proprietary internal Transition Alignment Rating is designed to help investment teams evaluate companies’ transition transparency, performance and ambition. The rating combines multiple metrics and compares progress relative to industry and geographic peers. The ratings can help the investment team prioritise and prepare for engagements.

These ratings can then be used at the portfolio level, either as a standalone metric or in combination with other metrics — such as engagement activity — to monitor progress towards the client’s longer-term decarbonisation goal. For example, for one of our LGPS clients, we target and report on the proportion of the portfolio’s carbon footprint covered by companies that are aligned, aligning or engaged.

What is the outlook in a changing world?
Surprising news drives new opportunities for our approach. We find that investors often overreact to unexpected short-term news, creating compelling valuation opportunities to invest in solid operating companies. Whether an industry-wide demand shock or change in a company’s stated transition plan, the team leverages Wellington’s multidisciplinary research and access to company management to assess valuations and longer-term prospects.

Given recent geopolitical shifts and economic uncertainty, we expect the volume of surprising news to persist, if not increase. Global Opportunistic Value’s active investment approach, which balances short-term news shocks with long-term fundamental and transition analysis, is well positioned to capitalise on these potential dislocations to achieve outperformance while meeting our clients’ net-zero emissions goals.

 

This material and/or its contents are current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management. This material is not intended to constitute investment advice or an offer to sell, or the solicitation of an offer to purchase shares or other securities. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. Wellington assumes no duty to update any information in this material in the event that such information changes. The value of investments can go down as well as up and capital may be lost.

In the United Kingdom, this material is provided by Wellington Management International Limited (WMIL), a firm authorized and regulated by the Financial Conduct Authority (FCA) in the UK (Reference number: 208573).

©2025 Wellington Management Company LLP. All rights reserved

More Related Content...