Eat your greens, they’ll get your portfolio through the next COVID-19 crisis
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Going green in your investments is good for returns, with Australia-based global funds with low carbon commitments having better-than-average protection from falling markets.
Funds that market researcher Morningstar designated as ‘low carbon’ had similar characteristics to their peers but tended to have higher quality portfolios.
“We measure quality using portfolio average return on equity and found low-carbon-designation fund portfolios delivered slightly higher ROEs than the index and higher ROEs than the world [other] category. We also found these portfolios had lower debt/capital ratios,” wrote Morningstar research director Grant Kennaway in a report.
Only 20 per cent of the ASX’s large managed funds are low carbon, according to Morningstar, which is around the same percentage as those in the US but lower than those in Europe.
But tellingly, few have adopted any environmental, social or governance (ESG) branding.
“Only one fund that received the Morningstar Low Carbon Designation in the Australian large-equity category had an explicit sustainability objective within its product disclosure statement objective,” Kennaway said, even though some have strategies that are clearly ESG-aligned.
The lowest carbon risk industries on the ASX are healthcare and tech while the highest are energy followed by utilities, due to Australia’s heavy reliance on fossil fuel extraction, export, and use.
Morningstar’s ‘low carbon risk’ score broadly combines exposure to physical risk, such as the increased severity of weather events, and transition risk, which looks at how vulnerable a company is to the transition away from a fossil-fuel-based economy to a lower-carbon economy, and then factors in corporate mitigation strategies.
Australia’s policy vacuum on energy and climate is great in the short term from a financial point of view, as the government is refusing to countenance any kind of carbon tax or strict emissions reduction program.
But Kennaway says this is a false economy as risks are likely to rise over the medium-long term.
Large investors are already using ESG frameworks to judge investments, with deVere CEO Nigel Green saying last month that ESG investments often outperformed the market and had lower volatility over the long-run.
“What is perhaps more impressive is that those investments with robust ESG credentials are still typically continuing to outperform throughout the coronavirus-triggered stock market crashes where major indices were extremely volatile, with some plummeting 20 per cent,” he said.
“ESG funds circumnavigate oil stocks, so their performance will not be adversely impacted by the fall in share prices.
“Clearly, this is going to increasingly attract both retail and institutional investors seeking decent returns in turbulent times.”
In Australia, thermal coal financing is increasingly under pressure as 134 banks, asset managers and insurers close their doors to new coal projects, according to Institute For Energy Economics And Financial Analysis (IEEFA).
Even the oil majors are starting to run from fossil fuels.
Both BP and Shell have flagged that their investments in renewable energy would be left largely untouched, even though they’ve slashed spending, share buyback programs and dividends.
“I wouldn’t say we have ring-fenced them; that would be too much,” Greentech Media quoted Shell chief executive officer Ben van Beurden as saying.
“There is an energy transition underway that may even pick up speed in the recovery phase of the crisis, and we want to be well-positioned for it.”