Climate investing myth busters: Five things people get wrong about low-carbon approaches

Climate investing is often assumed to involve a trade-off: better environmental outcomes in exchange for weaker performance. That assumption is too simplistic. In our view, a well-constructed approach can improve climate metrics while remaining close to the benchmark, controlling active risk and supporting long-term returns.

The real question is therefore not whether investors must sacrifice performance, but how climate objectives are implemented in practice, including any associated trade-offs.

Myth 1: Better climate outcomes mean weaker returns

Not necessarily; it depends on how climate objectives are implemented. Broad exclusions and concentrated positions can raise tracking error, but they are not the only route. Our Tilt approach is designed to improve selected climate metrics (such as carbon footprint) and ESG outcomes, while keeping active risk tightly controlled. Tracking errors for these strategies typically remain well below 1%, giving clients a high degree of confidence that benchmark-like returns remain achievable.

Myth 2: Climate investing is just exclusion

Exclusion can be appropriate in some cases, and we do apply targeted exclusions in areas such as illegal weapons and companies exceeding thermal-coal thresholds. But our broader philosophy is to minimise exclusions where possible in order to avoid large active-risk positions away from the benchmark. Instead, we favour engagement, where change is still possible. Low carbon and blanket bans are not synonyms.

Myth 3: You cannot own higher emitters in a climate strategy

This depends on how those holdings are assessed. A low-carbon strategy does not necessarily avoid all high-emitting sectors. Instead, it can differentiate between companies based on their relative performance and transition readiness.

Looking at emissions in a sector context, alongside forward-looking analysis, allows investors to identify those businesses that are better positioned to transition and adapt over time.

Myth 4: Climate investing is only about carbon data

Data provides an important foundation, but it is not sufficient on its own. Effective investing still relies on informed judgement, particularly when assessing forward-looking risks and opportunities.

A dedicated Responsible Investment team plays a central role, combining quantitative inputs with qualitative insights gained through engagement and analysis.

Myth 5: Climate portfolios introduce hidden biases

Optimising a portfolio for a climate metric can introduce unintended sector, size, or geographic tilts. This is not a design flaw, it is an inherent consequence of the engineering process. What matters is transparency: investors should understand whether they are seeking lower carbon exposure, accepting a different risk profile, or both, and price that into their expectations accordingly.

A more balanced perspective

Taken together, these myths point to a broader misconception: that low-carbon investing is a straightforward, one-dimensional choice. In reality, it sits across a spectrum of approaches, each involving trade-offs between risk, return, cost and impact.

Tilt strategies are designed with this balance in mind. They recognise that investors continue to value benchmark consistency, cost efficiency and scalability, while also seeking improved ESG and climate outcomes.

Rather than treating these objectives as mutually exclusive, the aim is to combine them in a way that reflects how portfolios are used in practice. This means supporting long-term returns while incorporating a more informed view of sustainability.

For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.

Investment risks

Investment Risk: The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested.

Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.

EPM Techniques: The Fund may engage in EPM techniques including holdings of derivative instruments. Whilst intended to reduce risk, the use of these instruments may expose the Fund to increased price volatility.

Liquidity Risk: In difficult market conditions the value of certain fund investments may be difficult to value and harder to sell, or sell at a fair price, resulting in unpredictable falls in the value of your holding.

Responsible Investment Style Risk: The Fund can only invest in holdings that demonstrate compliance with certain sustainable indicators or ESG characteristics. This reduces the number securities in which the Fund can invest and there may as a result be occasions where it forgoes more strongly performing investment opportunities, potentially underperforming non-sustainable funds.

Environmental, social and governance: A list of pre Environmental, social and governance: defined criteria that determines how a company operates in terms of sustainability and overall corporate governance.