Passive strategies choosing to exclude or tilt away from fossil fuels and carbon can do so without compromising investment performance, said a new paper by S&P Dow Jones Indices.
Coinciding with COP21, the United Nations climate change conference in Paris beginning Monday, Angana Jacob, research and design, at S&P DJI, analyzed the case for carbon-efficient investment.
Ms. Jacob found that the S&P Global 1200 Carbon Efficient index, which tilts toward low carbon-emission companies, produced a three-year annualized return of 9.85%, and a five-year annualized gain of 10.44%, as of Sept. 1. Annualized three-year volatility was 10.39%, and over five years, 13.94%.
The S&P Global 1200 Carbon Efficient Select index, an optimized low-carbon footprint index that excludes the stocks of the highest carbon-emitting companies, produced a three-year annualized return of 10.25%, and 10.75% over five years. Volatility was 10.31% over three years, and 13.82% over five years.
The comparative benchmark, the S&P Global 1200 index, produced a 9.62% three-year annualized return, and 10.02% for five years. Annualized volatility was 10.34% over three years, and 13.91% for five years.
“This is contrary to the widely held belief that investing in carbon-efficient companies could hinder performance,” said a statement accompanying the paper.
Further, the index provider's S&P Global 1200 Fossil Fuel Free index, which excludes companies that hold fossil-fuel reserves, topped the broader benchmark — the S&P Global 1200 index — by three percentage points over a one-year period.
S&P launched its latest index, the S&P Global 1200 Fossil Fuel Free Carbon Efficient index, Monday. The index divests from fossil fuels and then is tilted toward low-carbon emission stocks within sectors.
Ms. Jacob also looked at the correlation between Brent crude and high carbon emitters, finding it to be about 80%. High carbon emitters produced annualized returns of 2.46% since 2012, when commodities slumped, compared with low carbon emitters, which gained 16.84% over the period to January 2015. Between 2000 and 2011, during the commodities supercycle, companies that were the highest in carbon emissions produced an annualized return of 13.57%, vs. 8.03% from the lowest carbon emitters.