Does cutting carbon exposure cut into high returns?

New research indicates investors can enjoy high returns without the guilt of high emissions

Does cutting carbon exposure cut into high returns?

Even as the UN International Panel for Climate Change issues arguably its most urgent red alert ever, many investors are still held back from cutting their carbon exposure out of fear that they’ll significantly undercut their portfolios’ performance

But according to a new white paper from PanAgora Asset Management’s, investors don’t have to pay a steep performance cost when they target low carbon emissions exposure.

As reported by Institutional Investor, the paper draws from an analysis conducted by Mike Chen, the firm’s head of sustainable investments. Chen compared how a simulated carbon reduction portfolio, which was aimed at minimizing risk and restricting carbon emissions, would perform relative to the MSCI World Index.

While portfolio simulation studies have to be taken with numerous limitations and some grains of salt, his analysis found the impact of cutting carbon exposure on performance was minimal up to the 80% carbon reduction level. An “optimization solution,” which yielded the highest possible returns, was achievable even at carbon reduction levels of 90%.

Given the world’s current systemic dependence on energy and other products derived from fossil fuels, Chen said achieving 100% carbon reduction while maintaining returns comparable to the benchmark is nearly impossible for investors without the use of outside tools. Preserving performance while achieving lower carbon emissions, he found, requires a combination of stock selection and carbon offsets.

And while walking away from notoriously carbon-heavy sectors like utilities, materials, and energy is the most straightforward route to shrinking a portfolio’s carbon profile, the paper suggested complete divestment isn’t necessary. Instead, Chen recommended that investors look at the carbon emissions of individual portfolio holdings and just trim the worst offenders.

For investors who are unable to go whole-hog into creating sustainable portfolios, the report suggested beginning with a reasonable milestone, such as 50% carbon reduction, by using an active-ESG-as-alpha approach.


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