To comply with fiduciary duty, asset managers and owners are increasingly compelled to consider environmental, social and governance (ESG) metrics in investment decisions. Relative return asset managers (those benchmarked against an index) often include SG analysis as a qualitative rating because much of the information is difficult to integrate into traditional valuation models. This approach misses potential opportunities to outperform by separating environmental analysis from social and governance data. Asse owners typically allocate a majority of assets to relative return investments (over 70% of assets for some pension funds), and can aide asset managers by outlining a clear strategy to analyze environmental metrics.

This paper provides asset managers and owners with a novel relative return portfolio construction approach called Relative Climate Value (RCV) that separates E from S and G. In the RCV model, environmental metrics are expanded to include all climate exposure, or any potential gains or losses in a portfolio due to climate change. Climate exposure includes any impact on company valuations from frequency and severity of adverse weather, mitigation, adaptation and environmental innovation. The model utilizes comparative analysis for benchmark-oriented managers to capitalize on a changing climate and impending shifts in environmental legislation.