Net Zero Investment Portfolios - Part 2. The Core-Satellite Approach

69 Pages Posted: 25 Oct 2023 Last revised: 3 Nov 2023

See all articles by Mohamed Ben Slimane

Mohamed Ben Slimane

Amundi Institute

Dorianne Lucius

Amundi Asset Management

Thierry Roncalli

Amundi Asset Management; University of Evry

Jiali Xu

Amundi Asset Management

Date Written: October 24, 2023

Abstract

This article is the second part of a research project on net-zero investment. While the previous publication was dedicated to the integrated approach, this one focuses on the core-satellite approach. As explained in the first part, net-zero policies need to address two dimensions: decarbonizing the portfolio and financing the transition. The integrated approach combines these two dimensions in an allocation process that considers both carbon intensity for the decarbonisation dimension and green intensity for the financing dimension. However, we have found that carbon intensity and green intensity are currently positively correlated. Therefore, we propose a second approach to better identify the contribution of the two net-zero dimensions. In the core-satellite strategy, the decarbonization dimension is managed within the core portfolio, while the objective of the satellite strategy is to finance the transition to a low-carbon economy.

The choice of the decarbonization policy is an important step in the design of the core portfolio. At least, three issues need to be considered: the magnitude of the decarbonization pathway, the sequence of decarbonization, and the self-decarbonization property of the core portfolio. Moreover, a decarbonization pathway is not neutral if we refer to a strategic asset allocation process. In fact, it is equivalent to changing the implied risk premia derived from the Black-Litterman model. Building the satellite portfolio is certainly the most challenging part of the allocation process. It requires a deeper understanding of how to achieve net-zero emissions by 2050, specifically how to transform the current global value chain into a net-zero economy? As there is a gap in the current funding requirements, we need to prioritize financial investments and narrow the definition of the eligible investment universe. As a result, the investment processes of the core and satellite portfolios are very different. The core portfolio is more of a top-down allocation process and exclusion strategy, where the central climate risk metric is carbon intensity. The satellite portfolio is more of a bottom-up allocation process and asset selection strategy, where the central climate risk metric is green intensity. Finally, the risk assessment of the global core-satellite portfolio must be addressed.

Keywords: Net zero emissions, core-satellite strategy, decarbonization, transition, greenness, carbon intensity, green intensity, equity allocation, bond allocation, tracking error

JEL Classification: G11, Q5

Suggested Citation

Ben Slimane, Mohamed and Lucius, Dorianne and Roncalli, Thierry and Xu, Jiali, Net Zero Investment Portfolios - Part 2. The Core-Satellite Approach (October 24, 2023). Available at SSRN: https://ssrn.com/abstract=4611418

Mohamed Ben Slimane

Amundi Institute ( email )

90 Boulevard Pasteur
Paris, 75015
France

Dorianne Lucius

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015
France

Thierry Roncalli (Contact Author)

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015
France

University of Evry ( email )

Boulevard Francois Mitterrand
F-91025 Evry Cedex
France

Jiali Xu

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015
France

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