Attribution of Portfolios with Climate-Related Signals

Using innovative Shapley attribution, this study provides a framework for quantifying the impact of climate-focused metrics—such as carbon emissions, water use, and green patents—on portfolio performance, risk, and tracking error. BlackRock’s Andrew Ang, Debarshi Basu, and Marco Corsi offer investment professionals precise portfolio attribution of climate-aligned investment strategies. The research details how these signals contribute individually and collectively to portfolio outcomes, supporting tailored approaches to sustainable investing.

The Role of Shapley Attribution

Shapley attribution is central to the analysis, enabling precise decomposition of portfolio returns and risks to each climate-related signal. This method’s distinguishing feature is its summation to 100%, giving investment professionals a residual-free view of how climate signals contribute to overall portfolio performance. Importantly, Shapley attribution is particularly suitable for climate-related attributions where multiple signals interact. The Shapley framework offers a robust model for addressing key questions for investors, such as the relative impact of emission reductions versus green innovation on returns and risk.

Climate-Aligned Portfolio Construction

For constructing the climate-aligned portfolio, the authors used the universe of companies in the MSCI World Index, with carbon emission, water use, and green patent signals. The portfolio was constrained to maintain alignment with MSCI World benchmarks, such as limiting single-stock active weights to 3% and keeping country and sector weights within 2%. This design provides investors with a replicable approach for integrating climate factors into a diversified portfolio, balancing alignment with broad benchmarks while enhancing climate impact.

Performance and Risk Attribution

Empirical results over the period indicate an annualized portfolio return of 1.03% per month, compared to 0.98% per month for the benchmark, delivering an outperformance of 63 bps per year. The Shapley attribution highlights that water withdrawal scores were the largest positive contributor (58 bps) to the outperformance, while green patents slightly detracted (–9 bps). The analysis also demonstrated a tracking error of 1.63% relative to the MSCI ACWI, largely due to the carbon signal’s influence (77 bps), followed by water (67 bps), and green patents (19 bps).

In terms of carbon emission intensity, the portfolio achieved a 67% reduction relative to the benchmark’s emission level, underscoring its effectiveness for net-zero objectives. Notably, this reduction was not only due to the carbon-focused signal; there were also additional reductions in carbon emissions from water and green patent signals, contributing reductions of –18 and –7 metric tons per million dollars in sales, respectively. This cross-signal influence emphasizes that climate-related metrics can jointly contribute to lower carbon intensity even when they target distinct sustainability areas.

Observations on the Impact of External Factors

The report identifies fluctuations in signal returns based on macroeconomic events, highlighting climate signals’ variable behavior as a diversification tool. For instance, carbon signal returns were positive from 2018 to 2021 but turned negative in 2022 and 2023 due to energy price surges following geopolitical events, including the Russian invasion of Ukraine. Conversely, green patents, though detracting slightly over the full period, provided crucial diversification benefits in 2020, particularly during the COVID-19 pandemic when technology stocks surged.

Implications for Investment Professionals

This study offers investment professionals a possible way of integrating climate-aware signals into portfolio management while aligning with net-zero targets. The use of Shapley attribution allows for clear, exact breakdowns of the contributions of each climate signal, equipping investors with tools to meet diverse client preferences in climate investment. The attribution of risk and returns is very useful to clients seeking customized net-zero portfolios.

Importantly, the study underscores that climate-related signals drive risk-adjusted returns. By treating these as distinct, quantifiable factors—the effect of which on risk and return is measured exactly with Shapley attribution—investors can incorporate climate considerations into traditional portfolio management frameworks, potentially enhancing alpha and reducing downside risks related to climate change.

Conclusion

The authors provide a compelling case for using climate-related signals to enhance portfolio returns while supporting the transition to net zero. The Shapley attribution method empowers investment professionals with the ability to isolate and analyze the impact of each climate-related signal on risk and returns, facilitating a high degree of customization. By doing so, investors can construct portfolios that not only align with broader environmental objectives but also deliver competitive financial returns. The findings suggest that integrating diverse climate signals—beyond merely reducing carbon emissions—can yield significant diversification benefits, positioning investors to capitalize on the evolving market dynamics of the transition to a low-carbon economy.

Authors

Andrew Ang 
Managing Director, BlackRock, New York

Debarshi Basu 
Managing Director, BlackRock, New York

Marco Corsi 
Managing Director, BlackRock, London