3DInvesting:ImplicationsforNetZero©2024CFAInstitute.Allrightsreserved.|13DINVESTING:IMPLICATIONSFORNETZEROClintHowardQuantitativeResearcher,Robeco,Rotterdam,theNetherlandsMikeChenHeadofNextGenResearch,Robeco,Rotterdam,theNetherlandsTraditionalmean–varianceportfoliooptimizationisbasedonthepremisethatinvestorscareonlyaboutriskandreturn.Someinvestors,however,alsohavenonfinancialobjectives,suchassustainabilitygoals.Centraltothesegoals,suchasworkingtowardnet-zeroemissions,isthequestionofhowtoincorporatesuchobjectivesintoaninvestor’sportfolio.Weshowhowanextendedmean–variance–sustainabilityoptimizationcanincorporatesustainabilitygoalsintoaportfolio,particularlyaligningtheportfoliowiththenet-zerotransitionsetoutintheParisAgreement.Importantly,wecomparevariousmethodsforintegratingsustainabilitygoalsininvestorportfoliosandhighlighttheimplicationsofsuchapproachesoninvestoroutcomes.IntroductionNumerousapproacheshavechallengedthestandardrisk-and-returnportfolioframework.Allofthemfocusonmakinginvestmentdecisionsbasedonobjectivesthatarenotstrictlyriskorreturnbased,suchasimpactinvesting,sociallyresponsibleinvesting(SRI),orenvironmental,social,andcorporategovernance(ESG)investing.Accordingly,investmentpracticehasevolvedtoincorporatesustainabilityobjectivesintotheinvestmentproblem,includingmetricsrelatedtocarbonfootprint,ESGcharacteristics,andsustainabilitydevelopmentgoals(SDGs).Inthischapter,weexplorepotentialapplicationsandimplicationsofthe3DinvestingframeworkfromBlitz,Chen,Howard,andLohre(2024)inthecontextofnet-zerotransitionalignment,asoutlinedintheParisAgreement,adoptedattheUNClimateChangeConference(COP21)inParison12December2015.TheParisAgreementisalandmarktreatyinwhich195nationscommittedtolimitglobaltemperaturerisethiscenturytolessthan2°Cabovepreindustriallevelsandpursueeffortstotargetanincreaseoflessthan1.5°C.In2018,theIntergovernmentalPanelonClimateChange(IPCC)statedthatcarbonemissionsneedtoreachnet-zeroneutralityby2050tolimitglobalwarmingto1.5°C(IPCC2018).AchievingtheseambitiousclimateanddecarbonizationAuthor’snote:Thischapterisbasedonthearticle“3DInvesting:JointlyOptimizingReturn,Risk,andSustainability”intheFinancialAnalystsJournal(Blitz,Chen,Howard,andLohre2024),withanextendeddiscussionaroundpotentialnet-zeroimplicationsandapplicationsoftheoriginalarticle.TheviewsexpressedhereinarenotnecessarilysharedbyRobecooritssubsidiaries.InvestmentInnovationsTowardAchievingNetZero:VoicesofInfluence2|CFAInstitutegoalsrequiresinvestorstointegratenet-zerotransitionobjectivesalongsidetraditionalriskandreturnconsiderations,necessitatingflexibleportfolioconstructionframeworks.Consideringtheseambitiousclimateanddecarbonizationgoals,academicsandpractitionershavestarteddevelopingnewframeworksandtoolkitstoaddresstheurgentneedtodecarbonize.Atthecenterofthisworkistheconceptofdecarbonizationpathwaysandtrajectoriestowardnetzero.Theseconceptscanbeseenasanevolutionorextensionof“low-carbon”portfolios,whichaimtoreduceexposuretoassetswithhighcarbonfootprintsatthemomentofinvestment.Net-zeroportfoliosadditionallyaimtohelptransitiontheeconomyfrom“brown”to“green,”whichisinherentlyamorechallengingforward-lookingproblem.Barahhou,BenSlimane,Roncalli,andOulidAzouz(2022)arguethatconstructinganet-zeroportfolioismorecomplexthanconstructingadecarbonizedportfoliobecauseofthemulti-objectivenatureofreduci...
