Carbon Divestment or Higher Prospective Returns: A False Dilemma?

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Carbon Divestment

Stephan Bonte, CFA

Stephan Bonte, CFA - Director of Sustainable Investing

Why reducing carbon in credit portfolios doesn’t necessarily mean lower returns

Executive Summary

Climate change has been a growing concern among investors. The Conference of Parties (COP) “aims to achieve a legally binding and universal agreement on climate, with the aim of keeping global warming below 2°C.” 1 Many investors have begun “divesting” from high-carbon asset classes, or are considering doing so. Some seek to avoid the possibility of fossil fuel reserves becoming unburnable and worthless (aka “stranded assets”), while others are concerned about the impact of regulations (according to the International Energy Agency (IEA), rules governing climate change, energy efficiency and renewable energy have grown from less than 200 in 2005 to close to 1,400 in 2013). Other investors want to align their concerns about climate change with how they are investing.

Amid this general concern about fossil fuels and climate change, many investors assume that investing in low-carbon investment alternatives will automatically reduce potential future returns. Our research at Standish, however, has shown that there may be a way to reduce the carbon impact of corporate debt portfolios significantly without necessarily diminishing potential returns. We believe the key is judicious sector and issuer selection as well as understanding how to calibrate volatility, duration and credit quality in constructing low carbon corporate debt portfolios.

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