Tuesday, April 8, 2014

Carbon-free portfolios can outperform, even in Canada: study

The returns of a carbon-free portfolio can closely mimic – even outperform – the returns of a broad market index, according to a study by Aperio Group.

Annualized returns of Aperio’s hypothetical carbon-free portfolio in Canada were 9.23% over a 13-year period between 2000 and 2013, compared with 8.38% for the S&P/TSX Composite Index.

“The hypothetical returns for Tracking Portfolios should in no way be construed to imply that divestment leads to better performance,” Aperio noted. “It shows only that over the time periods analyzed, this version of divestment just happened to play out that way.”

Aperio used a two-step process in constructing its carbon-free portfolios. In the first step, oil, gas and consumable fuels stocks are excluded. In the second step, the remaining stocks are re-weighted so that the portfolio can track the index as closely as possible.

The study found a significant tracking error of nearly 3% in Canada, reflecting the substantial exposure to carbon stocks in the country’s market. That exposure averaged 20.6% over the 13-year study period.

Aperio notes that as funds normally allocated to carbon industries are reallocated, some sectors become overweight. For example in Canada’s carbon-free portfolio, the materials sector is overweight nearly 6%, utilities 3.7%. “In other words, the investment shifted from carbon-heavy energy producers to energy consumers,” the study says. “For some investors concerned with climate change, this transfer may not be acceptable from a values perspective.”

Screening out oil and gas stocks will remain controversial, particularly in Canada, but it seems that it is historically possible to closely track broadly diversified indexes with carbon-free portfolios.

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