Carbon-Sensitive Portfolios Perform as Well as Those That Aren’t

S&P studied companies demonstrating three levels of carbon sensitivity and found that all three held up in terms of stock performance; furthermore, S&P says these companies are well managed.

Since 42% of investors in a study by Schroders said performance was a primary concern in sustainable investing, S&P decided to investigate whether carbon-sensitive companies perform as well as those that are not sensitive to greenhouse gas emissions.

S&P considered three levels of carbon sensitivity and found companies at all three levels performed as well as those not sensitive to carbon pollution. In fact, as S&P notes in its ‘Trucost’ of Climate Investing Report, “several academic studies document that companies with lower carbon emissions have higher profitability than companies with higher emission activity. Highly profitable firms are usually well managed and have the resources to adopt proactive environmental strategies as a way to decrease regulatory liabilities. In addition, optimizing energy use reduces operating expenses and improves profitability either through the use of new energy-efficient equipment or adopting energy conservation policies.”

S&P took its study a step further to see whether other activities that generate pollution, such as air pollution, excessive water use and volume of waste generated, have an impact on stock returns. S&P found that they did not directly impact returns.

S&P concludes that “incorporating carbon intensity in a stock selection process does not detract from portfolio performance. All three carbon sensitive portfolios produce comparable returns to the baseline portfolio.”

At the 2019 PLANADVISER National Conference, speakers said that retirement plan sponsors are looking for advisers with environmental, social and governance (ESG) experience. They said there are many more ESG-labeled products on the shelf today, and the ESG theme is being programmed into many funds and investment products that do not explicitly carry an ESG label. Additionally, plan sponsors are running analyses of their existing fund menus to rate them from an ESG perspective, and using this type of thinking to help steer decisions about tailoring the investment menu.

The speakers added that some sponsors even think that ESG can drive outperformance.  In addition, a recent Morningstar report found that 72% of investors are interested in ESG investing.