The portfolio interaction between a company’s carbon footprint and investment in renewables can be complex. Many enterprises with a high carbon footprint are also important actors in renewable energy. Faced with pressures from investors, regulators, governments, and/or customers to reduce their carbon footprint, they can either divest their most carbon-intensive assets, and/or invest in renewable energy production as a counterweight.
Power producers mixing high-CO2 generation with renewable technologies are therefore more common than renewable pure players.
A few examples among others of such mixed power generators include
The wide-spread comingling of renewable assets and carbon-intensive assets creates a paradox for investors; by increasing portfolio exposure to renewables they will almost certainly increase the exposure to coal and in turn drive up portfolio carbon intensity.
At Candriam, we consider it more efficient for investors to optimise their portfolio towards a specific carbon intensity in a sector-neutral way, rather than just exclude the most CO2 intensive sectors, e.g. energy, materials and utilities.
Furthermore, our analysis shows that achieving a high degree of investment in renewable energies requires exposure to carbon intensive sectors. This is due to the persistence of dual players, such as those who produce electricity from both fossil energy sources and renewable energy sources.
To estimate the impact of a carbon intensity mitigation approach on investment returns, we analysed the correlation between carbon intensity (CI) and financial returns over a nine-year period, December 2009 to December 2018 using decile analysis. We divided the global equity universe into ten equally-weighted portfolios at the beginning of each month, based on the carbon intensity factor. We compared their performance to that of the equally-weighted universe over the subsequent month. The portfolio was rebalanced on a monthly basis.
The chart shows that over the nine years, the portfolios containing the stocks with the lowest carbon intensity (Low CI) generally tended to outperform the universe whilst those that exhibit the highest carbon intensity (High CI) tended to underperform.
Note: These results above are based on simulated or hypothetical results that have certain inherent limitations. Unlike the results shown in an actual record, these results do not represent actual trading. Because these trades have not actually been executed, these results may have under-or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve results similar to these being shown.
Our analysis shows that the share prices of those companies which made the most progress in carbon reduction outperformed the 'carbon-cutting laggards' over the nine-year period. This might be the result of on-going changes in regulation, combined with a growing awareness by investors regarding the investment risks arising from climate change.
|DOWNLOAD THE RESEARCH PAPER|
This Research Paper is dedicated for professional investors only
Source: company annual reports, 2018