Top of mind for many clients: what impact do climate screens have on portfolio performance?

Climate-related screens are widely used across the sustainable investment landscape, yet investors still question how different screening approaches affect performance and risk relative to traditional benchmarks. This research from FTSE Russell and HSBC Asset Management applies a range of climate-related screening sets to the FTSE All World Index, quantifying their impact on tracking error, index composition and returns over five- and ten-year periods.

Key takeaways: 

• Climate screening exists across a broad spectrum –Screens can range from highly targeted, such as majority Thermal Coal producers affecting less than 0.1% of an index, to broad Oil & Gas screens across the value chain affecting more than 11% of index weight.
• Targeted screens can have minimal impact on risk and performance – Specialist climate screens tend to show low tracking error and limited performance impact relative to the FTSE All World Index.
• Tracking error generally increases as screens broaden – Larger screens were typically associated with higher tracking error, though climate screens still showed lower tracking error than broader sustainability or climate indices.
• Performance outcomes vary across time periods and screening approaches – The analysis found no consistent relationship between the size of a climate screen set and relative performance. Some screens added to returns while others detracted, depending on market conditions and time horizon.

Points of differentiation: 

• Quantifies the impact of different climate screening approaches – The paper compares progressively stricter screens, from targeted Thermal Coal screens to Climate Transition Benchmark and Paris-Aligned Benchmark frameworks, across tracking error, relative performance outcomes and resulting shifts in industry exposures. The analysis also considers how outcomes can vary across market regimes and between developed and emerging markets, and briefly examines comparable effects in corporate bond indices.
• Cross-referencing sustainability with investment risk – Provides a potential guide to help investors match their sustainable philosophy with their risk appetite.

What does our research mean for investors? 

This research highlights that climate-related screens represent a continuum of approaches with different implications for risk, tracking error and performance. Investors may be able to apply narrow screens with minimal impact relative to traditional benchmarks, while broader screening frameworks may result in more material changes to index composition and risk characteristics.

The analysis is designed to help investors align climate screening policies with both sustainability objectives and risk appetite, while informing broader discussions around benchmark construction and the evolution of sustainable investment regulation.