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Information contained in this area of the Website is published solely for general informative purposes and intended only for United States institutional investors, consultants, registered investment advisers (RIAs), financial advisers (FAs), and other financial intermediaries who are knowledgeable and experienced in the financial services market and investment products. If you are a retail or individual investor then please leave this website. The information is not authorized for use in a jurisdiction where distribution is not authorized and is not intended for distribution to individual retail clients. If you choose to access this Website from locations outside of the United States, you do so at your own initiative and risk, and are responsible for compliance with all applicable laws.

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Decline - Redirect me to

Mitigating human-induced climate change is one of our generation’s most significant challenges and has reached new heights of concern after a year of forest fires and flooding, of heatwaves and hurricanes. To help decarbonization efforts, many asset owners and asset managers have turned to low carbon investing. For instance, Intech and other signatories of the Net Zero Asset Managers Initiative intend to increase the proportion of assets managed in line with efforts to reach net-zero greenhouse gas emissions by 2050.

We fully recognize that our primary mission as an asset manager is to help you address investment challenges, not climate challenges. While that mission may be less weighty than global climate change, it’s no less critical for your stakeholders today. Unfortunately, some important investment solutions of our day, such as defensive, low volatility equity strategies, may appear objectionable to climate-minded investors.

Two imperatives of our day – decarbonizing and de-risking – appear to be on a collision course. Can you reconcile these objectives? What are the trade-offs?

Decarbonization Imperative

The climate change urgency intensifies each year, with rising greenhouse gas emissions contributing to the earth’s higher average surface temperature. We recorded one of the warmest years on record in 2020 – more than 1.2° Celsius (2 degrees Fahrenheit) higher than in 1880 (see chart below).1


Paleoclimatology tells us that the earth’s temperature has been relatively stable, but since the dawn of industrialization, the atmospheric concentration of greenhouse gases like carbon dioxide has been rising as we burn fossil fuels such as coal, oil, and natural gas.2 These pollutants absorb sunlight and solar radiation that would typically bounce off the earth and into space, trapping the heat and warming the planet.

If we continue to see an unabated rise in greenhouse emissions, extreme weather events and rising sea levels will persist, which have had and will continue to have widespread economic consequences.

De-risking Imperative

With bond yields at all-time lows and allocations to less-liquid alternatives already high, equities’ role in helping fund and pay future liabilities, or grow participant savings balances, is increasingly crucial. Unfortunately, unprecedented uncertainty at today’s lofty market levels makes it increasingly difficult for investors to stay the course with equity-dominated portfolios.

Rather than reducing equity allocations, some investors are seizing the opportunity to de-risk them. By replacing part of your core equity holding with a defensive, low volatility strategy, you have the potential to reduce overall portfolio volatility and mitigate drawdowns while at the same time preserving long-term return expectations and portfolio liquidity.

Derivatives' Drawbacks

If you assume traditional low volatility equity strategies have to be high carbon portfolios, why not instead turn to derivatives as a means of defensive equity investing?

Derivative strategies, such as purchasing a put option, a put-spread, or a zero-cost collar, are akin to buying fire insurance for your house. The policy may be replete with caveats and generally doesn’t pay off until your home has burned to the ground. Instead, low volatility strategies help prevent your house from burning down in the first place – they act more like fire-retardant materials, attempting to add a layer of resiliency against a potential fire. They should be included as foundational elements when constructing an equity allocation.

What’s more, derivative approaches have performance costs that can rise rapidly in proportion to market volatility, timing precision, and willingness to roll the strategy forward. In contrast, low volatility strategies may lag the general market in some periods, but over the long-term have historically offered market-like returns. They also have predictable, asset-based fees that are typically lower than most traditional active-risk strategies.

The illustrations below make a simple, cyclical case for low volatility investing. Low volatility equities have historically offered market-like returns with a quarter less volatility than a cap-weighted benchmark, allowing for better compounding over time. But the recent market environment has led to record under-performance for low volatility investing. That makes allocations to defensive equity especially compelling today.

Low Vol vs cap weighted returns

High Carbon, Low Volatility Stocks

Low carbon and low volatility investing are seemingly incompatible visions, especially if you tie the benefits of low volatility investing to holding low volatility stocks. Through that lens, low volatility investing might produce a portfolio of very high carbon emitters, underscored by a significant overweight to the utilities sector.

S&P helps illustrate this perceived problem, since they employ a stock-driven approach to creating the S&P 500 Low Volatility Index. The Index selects the least volatile stocks and weights them in inverse proportion to that same metric. Consequently, relative to the S&P 500 Index, the S&P 500 Low Volatility Index has a 15% overweight to utilities – a sector with the highest relative carbon intensity – while significantly underweighting sectors with low relative carbon intensity (see charts below).


Harmonizing Low Volatility and Low Carbon Investing

Low volatility and low carbon investing do not seem compatible using this approach. And we wouldn’t blame anyone for holding this notion; after all, given years of rising equity markets, few investors have seriously examined the advancements in low volatility investing. Leaders in low volatility equity investing sought to address similar types of concentrated risk exposures a long time ago. Handling the problem of overexposure to high carbon emitters should be no different. To find out how this is possible, download this important resource for defensive equity investors, “Can You Make Low Vol and Low Carbon Investing Compatible?

Harmonize Low Carbon and Low Volatility Investing  How to decarbonize and de-risk concurrently Learn More



1. 2020 Tied for Warmest Year on Record, NASA Analysis Shows. (2021). Retrieved 14 October 2021, from

2. USGCRP, 2017: Climate Science Special Report: Fourth National Climate Assessment, Volume I [Wuebbles, D.J., D.W. Fahey, K.A. Hibbard, D.J. Dokken, B.C. Stewart, and T.K. Maycock (eds.)]. U.S. Global Change Research Program, Washington, DC, USA, 470 pp, doi: 10.7930/J0J964J6

The views presented are for information purposes only and should not be used or construed as investment, legal or tax advice or as an offer to sell, a solicitation of an offer to buy, or a recommendation to buy, sell or hold any security, investment strategy or market sector. Nor do they purport to address the financial objectives or specific investment needs of any individual reader, investor, or organization. The views are subject to change at any time based upon market or other conditions, are current as of the date indicated, and may be superseded by subsequent market events or other conditions.

Past performance is no guarantee of future results. Investing involves risk, including the possible loss of principal and fluctuation of value. As with all investments, there are inherent risks that need to be considered.

There is a risk/reward tradeoff that comes with investing in low volatility strategies. These strategies are likely to underperform the index especially in strong up-markets and there is a possibility they will not achieve the desired level of protection in down markets.

Index returns do not reflect transaction costs or the deduction of fees. It is not possible to invest directly in an index.

MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This material has not been approved, reviewed, or produced by MSCI.

S&P 500 Dow Jones Indices LLC and/or its affiliates make no express or implied warranties or representations and shall have no liability whatsoever with respect to any S&P data contained herein. The S&P data has been licensed for use by Intech and may not be further redistributed or used as a basis for other indices or any securities or financial products. This material has not been approved, reviewed, or produced by S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC's indices, please visit

Intech is the source of data unless otherwise indicated, and has reasonable belief to rely on information and data sourced from third parties.