Low-Carbon Investing Doesn’t Have to Mean Low Return

29 September 2020

5 min read

Roy Maslen| Chief Investment Officer—Australian Equities

Kent Hargis, PhD| Chief Investment Officer—Strategic Core Equities; Portfolio Manager—Global Low Carbon Strategy

Sammy Suzuki, CFA| Head—Emerging Markets Equities

Investing in businesses that strive for a better climate through decarbonization doesn’t necessarily assume a lower bar for performance. Just the opposite. Besides contributing to a healthier environment, low-carbon equity investing can also offer attractive return potential.

Myriad forces are driving a shift toward low-carbon investing, with governments, corporations and investors all contributing. As a global community bands to combat the problem, more capital flows toward efforts to address climate change. All this creates opportunities for investors to play their part, while doing it well within scope of their long-term financial goals. Investors may no longer need to choose between a better environment or competitive returns, because it’s increasingly possible to have both.

Governments Set the Tone, Companies Step Up

Sharper demand for low-carbon investing is partially linked to intensifying government efforts toward climate improvement. Nations are especially fixed on decarbonizing their economies, and nearly 200 of them support the Paris Agreement, designed to help manage global warming by 2050. Specifically, the accord’s central aim is to strengthen the global response to the threat of climate change by keeping a global temperature rise this century well below 2 degrees Celsius and limiting the temperature increase even further to 1.5 degrees Celsius.

While governments stress urgency, many companies are already way ahead at shrinking their carbon-emissions output. From finance and fossil fuels to transportation and technology, forward-looking businesses see higher value in a lower carbon footprint. And it’s starting to make a difference.

For example, Nestlé now sources core agricultural items like cocoa and sugar from regions less impacted by climate change. Likewise, Home Depot maintains a 24/7 command center to keep customers supplied during hurricanes and other extreme weather.

Low-carbon investing also works hand-in-glove with growth initiatives. For example, miner Rio Tinto is developing technology to produce carbon-neutral aluminum that meets the needs of important clients like Apple and Alcoa. Even some airlines are trailblazing, with Qantas Airways creating new and smarter travel routes and schedules that burn less fuel.

Whether among the highest emitters, like Royal Dutch Shell, or lower-emitting businesses such as Microsoft, low-carbon strategies are improving bottom lines and fundamentally changing how companies do business up and down their supply chains.

Strong Demand for Low Carbon Is Prevalent Among Large Investors

Portfolios that target low-carbon companies are gaining popularity as investors become increasingly climate aware. Demand is particularly strong among institutional asset owners, with many sharing best practices and comparing notes as the investment approach shifts from niche to mainstream. The Net-Zero Asset Owner Alliance, formed at the UN’s 2019 Climate Summit, will be a touchstone for standards and accountability for decades. Founding members Zurich, Allianz, CalPERS and SwissRe, with others, already account for the greatest share—some $2 trillion—of assets under management that target net-zero emissions by 2050 (Display left).

Growing Institutional Interest in Low-Carbon Portfolios Puts Focus on Emissions

On left, managed assets of equities with net-zero emissions goals and, on right, all carbon emissions of the MSCI World Index.

Left display as of May 8, 2020; right display as of February 10, 2020
*Scope 1 from currently combusted fossil fuels. †Scope 2 from energy consumption. ‡Scope F are from fossil fuels produced but not yet consumed
Source: Bloomberg, BP Statistical Review of World Energy, Energy Information Administration, MSCI, Net-Zero Asset Owner Alliance and AllianceBernstein (AB)

“Price on Carbon” Is a Game Changer

Practically every business model is linked to carbon emissions, whether as a producer or consumer of energy, or even indirectly via their supply chain. Emissions are measured in metric tonnes of CO₂ equivalents (CO₂e) per annum and the combined annual CO₂e emissions for the MSCI World Index is 9.5 billion tonnes, as of February 10, 2020. That’s 210 tonnes for every US$1 million in market capitalization, including Scope F emissions, from fossil fuels that have been produced but not yet consumed (Display right).

With carbon emission levels widely varied across companies, factoring their cost implications up front offers an insightful apples-to-apples comparison across the investment universe. This “price on carbon” priority is a dynamic factor that can dramatically change a company’s forecast in an instant. The World Bank calls it one of the “strongest levers we have to shift financing toward climate action.” Price on carbon is a rapidly growing internal gauge as companies form strategies as well as a powerful tool for low-carbon investors to assess them more accurately (Display). As more companies incorporate a price on carbon when making decisions, investment analysts should also, so they can build more accurate forecasts to identify attractive opportunities.

More Companies Using “Price on Carbon”

The number of companies now pricing carbon into their strategies, or saying they plan to, from 2015 through 2019.

Through December 31, 2019
Source: Carbon Disclosure Project and AllianceBernstein (AB)

A price on carbon can also help catch tangential but related fundamentals that impact a company’s bottom line, like potential regulation (carbon taxes) and complying with standards (costly upgrades). These are typically found across several different CO₂e emission “scopes” that should all get equal scrutiny. Whether CO₂e emissions are from current fossil fuel combustion and consumption or potential future releases from fuels not yet consumed, we believe investors should weigh them all to fully grasp their impact on a company’s value. From there, further research would drill down to other telling characteristics of quality, stability and price.

Can Decarbonizing Help Long-Term Performance?

Lowering carbon output should lead to better climate outcomes, but its return potential still has skeptics. In our view, low-carbon investing can help improve alpha over time, especially when lower returns have been seen among higher-emitting stocks. For the five years ending in 2019, our research suggests that the highest carbon-emitting companies underperformed, even as oil prices rose. And when comprised of an optimal mix of actively selected, high-quality, stable companies with reasonable valuations, we believe a low-carbon portfolio can be well positioned to mitigate risk in down markets and participate in the upside over time.

Since the 2015 Paris Agreement, the world suffered its five hottest years on record. With renewed urgency, governments and businesses strive for climate improvements. Meanwhile, more investors are expressing their desire for greener approaches to profitability and returns.

We think all of these can work together to make a better world while generating a smoother pattern of competitive returns. The future looks bright, and perhaps less warm, with the help of low-carbon investment strategies.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

About the Authors

Roy Maslen

Roy Maslen was appointed Chief Investment Officer of Australian Equities in 2012, and has been managing Australian equity portfolios at AB since 2005. Previously, he served as co-CIO and director of Research. Prior to joining the firm in June 2003, Maslen was an associate principal with McKinsey & Company. During his seven years at McKinsey, he worked in Australia, Europe and North America. Before that, Maslen spent four years with Rolls-Royce Aerospace as a manufacturing strategy researcher. He holds an MEng from the University of Cambridge, where he was sponsored by Shell UK as an engineer, as well as a PhD in manufacturing strategy from the University of Cambridge. Location: Sydney

Kent Hargis, PhD

Kent Hargis is the Chief Investment Officer of Strategic Core Equities. He created the Strategic Core platform and has been managing the Global, International and US Strategic Core portfolios since their inception in 2011. Hargis has also been Portfolio Manager for the Global Low Carbon Strategy Portfolio since 2022. Previously, he managed the Emerging Portfolio from 2015 through 2023. Hargis was global head of quantitative research for Equities from 2009 through 2014, with responsibility for directing research and the application of risk and return models across the firm’s equity portfolios. He joined AB in 2003 as a senior quantitative strategist. Prior to that, Hargis was chief portfolio strategist for global emerging markets at Goldman Sachs. From 1995 through 1998, he was assistant professor of international finance in the graduate program at the University of South Carolina, where he published extensively on various international investment topics. Hargis holds a PhD in economics from the University of Illinois, where his research focused on international finance, econometrics and emerging financial markets. Location: New York

Sammy Suzuki, CFA

Sammy Suzuki is Head of Emerging Markets Equities, responsible for overseeing AB’s emerging-markets equity business and instrumental in the formation and shaping of AB’s Emerging Markets Equity platform. He was also a key architect of the Strategic Core platform and has managed the Emerging Markets Portfolio since its inception in 2012, and the Global, International and US portfolios from 2015 to 2023. Suzuki has managed portfolios since 2004. From 2010 to 2012, he also held the role of director of Fundamental Value Research, where he managed 50 fundamental analysts globally. Prior to managing portfolios, Suzuki spent a decade as a research analyst. He joined AB in 1994 as a research associate, first covering the capital equipment industry, followed by the technology and global automotive industries. Before joining the firm, Suzuki was a consultant at Bain & Company. He holds both a BSE (magna cum laude) in materials engineering from the School of Engineering and Applied Science, and a BS (magna cum laude) in finance from the Wharton School at the University of Pennsylvania. Suzuki is a CFA charterholder and was previously a member of the Board of the CFA Society New York. He currently serves on the Board of the Association of Asian American Investment Managers. Location: New York

This is a marketing communication. This information is provided by AllianceBernstein (Luxembourg) S.à r.l. Société à responsabilité limitée, R.C.S. Luxembourg B 34 305, 2-4, rue Eugène Ruppert, L-2453 Luxembourg. Authorised in Luxembourg and regulated by the Commission de Surveillance du Secteur Financier (CSSF). It is provided for informational purposes only and does not constitute investment advice or an invitation to purchase any security or other investment. The views and opinions expressed are based on our internal forecasts and should not be relied upon as an indication of future market performance. The value of investments in any of the Funds can go down as well as up and investors may not get back the full amount invested. Past performance does not guarantee future results.

This information is directed at Professional Clients only and is not intended for public use.

Low-Carbon Investing Doesn’t Have to Mean Low Return

Governments Set the Tone, Companies Step Up

Strong Demand for Low Carbon Is Prevalent Among Large Investors

“Price on Carbon” Is a Game Changer

Can Decarbonizing Help Long-Term Performance?

More For You