A debate is brewing as to whether headline (or “top-down”) Sustainable Investment (SI) targets, such as carbon emission reductions or ESG uplifts, are inconsistent with stock level (or “bottom-up”) conditions required for successful corporate engagement.
We present a transparent portfolio construction technique that:
- Allows multiple and precisely set portfolio level SI targets to be achieved.
- Has the flexibility to include various stock level constraints and exclusions.
- Retains a simple relationship between stock weighting and SI characteristics that is essential for engagement purposes.
This paper demonstrates how the target exposure methodology can be used to construct indexes with multiple portfolio-level objectives that are consistent with desirable SI characteristics at the stock level and examines simulated indexes covering a number of use cases that provide varying levels of engagement using tilts, stock level constraints and stock exclusions.
