Compute and analyse the carbon risk of your investments
Climate change has become a concern for all! In this sense, we must act for a carbon-free world, requiring greener investments and less carbonated portfolio strategies.
Several strategies have been implemented to achieve a prosperous, modern, competitive, and climate-neutral economy. In terms of climate policy, the EU has issued Carbon Permits in 2005. Since then, the increasing cost of the carbon emission related to emissions gives a measure of the “Transition risk” – the risk related to a shift toward a low-carbon economy.
Due to the overwhelming need for mobilising new investments, an increasing number of asset managers are implementing new processes to differentiate the financial return attributed to these strategies from the return provided by the portfolio. It is, therefore, necessary to improve the carbon performance attribution methods to measure the impact of emission reductions on performance.
The Transition Risk of your Investment
Each company emitting greenhouse gases (GHG) has a liability that can be measured through the Carbon Permit price. AMINDIS R&D department developed a methodology* helping investment managers to measure the transition risk of their portfolio and identify the most exposed holdings.
*Published in the Journal of Performance Measurement
How to improve your portfolio strategy investment?
The actions that companies will put in place to mitigate climate challenges, cannot be perfectly known in advance. However, by focusing on low-emitting securities, AMINDIS's methodology measures the impact of over/underweighting carbon-emitting sectors and securities on the return of the portfolio. Our approach provides a better understanding of the challenges in the medium and long term of the low-carbon transition.
The methodology can be used for different purposes in the investment management process:
- Ex-ante risk assessment
- Portfolio optimisation by reallocating securities to lower the transition risk
- Stress testing
- Portfolio reporting (client and regulatory)
- Back testing the carbon reduction trajectory
Carbon Performance Attribution
Investors are now integrating climate indicators into the construction of their portfolios to target larger-scale investments. Putting this indicator in direct relation to the carbon gain makes it possible to properly measure the impact of the investment strategy aimed at reducing carbon emissions. The proposed methodology makes it possible to calculate this carbon cost and highlight the carbon effect in the performance attribution.
The Advantages of investing with a lower carbon footprint
Investors can achieve their carbon reduction targets while better understanding the effects of an investment strategy of choosing securities with a lower carbon footprint. This method is in line with the New I.R.R (Impact, Risk, Return) approach, which aims to measure the cross-effects between sustainability, return and risk objectives.
This method has the following advantages:
- It requires a limited amount of data for its implementation.
- It allows an immediate comparison between issuers in the same sector.
- It explains the correlation between the performance of the portfolio and its positioning on a sustainability factor such as carbon footprint
- It provides a better assessment of the quality of a company's business model when the carbon cost factor is cancelled.
- The quality of management in terms of the carbon objective is highlighted when communicating with the investor.
- The cost of carbon can be adapted to factors specific to the company or sector
The only solution allowing you to solve the Impact, Risk, Return equation with a holistic view across all business functions for premium investment decisions!