Low carbon strategies outperform

In most regions, the low carbon intensity strategy performed in-line with or slightlyÌýbetter than the benchmark, showing that investors could have reduced the carbonÌýintensity of their portfolios without sacrificing returns. In Europe, the low carbonÌýintensity strategy would actually have strongly outperformed the benchmark, with anÌýInformation Ratio of 1.20.

Increasing numbers of investors are interested in green investing

There are a few possible explanations for this lack of underperformance. Firstly, it may beÌýthat the proportion of investors who are interested in 'green' investing is growing and soÌýgreen stocks are in heavy demand as these new investors move their assets away fromÌýcarbon-heavy firms.

Government policies penalising high carbon firms?

Secondly, it may be that governments are introducing new, more aggressive policies to reduce carbon emissions e.g. banning the sale of petrol cars or raising carbon taxes. If so, you would expect that low carbon strategies would work better in the 'dirtiest' sectors which would be most affected by these policies. We did not see this. In fact, the low carbon strategy would have been most effective in the financials sector, which is one of the least carbon intensive.

Lower carbon intensity is associated with more efficient businesses

Thirdly, it may be that low carbon intensity firms are more efficient than their peers and thus higher quality. This is intuitive. If carbon emissions are a good proxy for the use of resources more generally, then low carbon intensity firms are producing goods with fewer resources than their peers.

We did find a strong connection between carbon intensity and quality. The ROE factorÌýportfolio had the lowest carbon intensity of any of the classic quant portfolios. Also,Ìýwhen we regressed the returns to the low carbon intensity strategy onto the returns to aÌýstrategy based on a classic measure of firm efficiency, such as asset turnover, we found aÌýpositive and statistically significant beta, though there was still a significant alpha,Ìýsuggesting that low carbon intensity is more than just an efficiency metric.

It appears that investors can drastically reduce the carbon intensity of their portfoliosÌýwithout underperforming and may achieve outperformance. The main threat to the lowÌýcarbon intensity strategy is that the pool of investors interested in green investing stopsÌýgrowing.