Can Good Deeds Produce Long-Term Returns?

Investors worldwide are increasingly concerned about the impact of their decisions on the future of the planet. At the same time, of course, they want to generate returns. Are the two goals mutually exclusive?

We examined how investors can incorporate climate-aware indices into a portfolio, and assessed the differences between the S&P Carbon Control Index Series and their traditional market-value-weighted counterparts. The ultimate goal was to establish whether using these indices can deliver the twin goals of reducing carbon emissions and delivering long-term returns.

A Booming Field

Globally, assets under management in climate-aware funds grew at a CAGR of about 15% a year over the past decade, from around US$600 million to more than US$2.2 trillion.1 In Australia, the growth trajectory has been even steeper at an annual average of 34%.1

The trend is undeniable – but how do these investments perform? Historical analysis suggests there is indeed a carbon premium, and that lower-carbon-intensity stocks to lead to higher returns.

In our view, there is reason to believe this is the case, but to understand the impact of using the Carbon Control Indices in place of their market-cap-weighted benchmarks, we created a carbon-aware simulated portfolio using S&P Carbon Control developed ex-Australia and emerging markets indices and compared it against its market-cap multi-asset benchmarks (market-value-weighted multi-asset benchmark).2

Positive Returns

The results (Figure 1) show that historically, both climate-aware portfolios outperformed the market-cap weighted multi-asset benchmark across different time periods.

Given recent market volatility, we must be cautious about extrapolating past results to predict the future. Even so, we can reasonably expect that lower-carbon-intensity stocks will continue to find medium and longer-term support as the world tilts toward renewables and low-carbon energy alternatives.

Figure 1: Hypothetical Model Portfolio Using Carbon Control Benchmarks

Hypothetical Model Portfolio Using Carbon Control Benchmarks

Both climate-aware portfolios demonstrated not just financial outperformance but also a material reduction in their carbon-emissions intensity after replacing their market-cap weighted benchmarks with Carbon Control Indices. For the S&P Developed ex-Australia Carbon Control Index, we saw a reduction of nearly 70% in emissions intensity compared with the Developed ex-Australia broad benchmark. For the S&P Emerging Markets Carbon Control Index, there was an even stronger reduction in carbon emissions (more than 80% on average3) compared with the broad benchmark.

For investors, the results of this study suggest that reducing carbon intensity by following these indices does not materially impact portfolios. Not only that, it represents a sensible investment strategy for long-term returns, and a responsible one for the future of the planet.

To downloaded a copy of the full research report, How to Mitigate Climate Risk with International Equities, click here.

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