Trucost Blog

Robert Schwob, Chief Executive Officer at Style Research uses Trucost data to investigate the investment case for carbon. Republished from the Style Research blog with thanks.

Investing in clean companies with low carbon footprints again looks promising.  But you have to be careful how you do the assessments; and you have to be careful where you follow your conscience.

I often get calls from Mike on a Friday.  He's a journalist, under pressure, and as Friday deadlines loom, this fires his search for interesting ideas. So this morning I was not surprised when he phoned to ask "What's happening with low carbon emissions companies these days?  I've been researching a piece on this and some managers are telling me that over the recent past, ‘Clean is Good'. Any ideas? Have you done any research about this?"

I was honest.  "No, not recently. But give me a few hours and I'll get back to you."  So I started to check.

First I just looked at the overall picture.  I opened the database on all the companies in the developed markets and selected, simply, the cleanest 25% according to the Trucost Carbon Footprint statistic.  No luck.  It looked like these low carbon emission companies underperformed by 5.6% over the past year.  But the portfolio was really unbalanced, about triple weighted in Financials, nothing in Oil & Gas or Utilities and many more awkward positions as well.  So I knew I had to do things a bit differently.

Realizing that sector imbalances (and possibly country imbalances) were distorting the results, I redid the analysis choosing the cleanest companies within countries and sectors; i.e., comparing companies against their direct competitors within the same country and sector and selecting the cleanest 25% within each subset. And the results looked much much better. Clean companies outperformed by 1.3% since June 2010 (in fact, they have outperformed since late 2008).

This confirmed the results that Mike referred to and I could have stopped and called back just then.  But it was a slow morning and I decided to look a bit further. Then it became really very interesting. First I remembered that not all sectors are equal in their carbon emissions.  There are the clean sectors: Financials, Technology, Healthcare, Telecomms, Consumer Services, where the average Carbon Footprint of companies is generally below 150 (tonnes of CO₂, or equivalent, emissions per £1,000,000 turnover).  And then there are the higher emissions sectors: Oil & Gas, Utilities, Consumer Good, Industrials and Basic Materials, where the averages start at around 250 and go to over 2500.

Creating portfolios favouring clean companies in the first list doesn't do much to "Save the Planet" since just about all companies in these sectors are inoffensive environmentally.  It is what happens in the second list that really matters for the environment.  So I wanted to see if, within these two groups, there were any noticeable differences in the performance of clean vs dirty companies and, consequently, in the performance of clean vs. dirty investment strategies. The results are quite clear.

Sector Relative Returns - 12 Months to End June 2011

Over the past year, it has certainly paid off investing in clean companies in the clean sectors.  But, in the dirty sectors, the performance of clean companies has been disappointing and, in almost all cases, below that of the sector as a whole.

So if investors are conscientious where it doesn't really matter, they gain.  But if they are conscientious in the sectors where it really does matter, they mostly lose. This is very peculiar.  But maybe it does make some sense.

Just as a hypothesis: In the clean sectors, well managed companies tend to outperform poorly managed companies - this is, I expect, well documented; and, because they are well managed, they mostly have deliberate, conscientious, environmental strategies. However, when investing in the dirty sectors, particularly Oil & Gas, Utilities and Basic Materials, investors have already crossed a psychological threshold.  And on this far side of the environmental line it is understood that they probably don't think much about carbon footprints - so: "In for a penny, in for a pound".  Or, as Mike put it as we puzzled our way towards an interpretation: "I am already a sinner, so, barman, yeah - sure, pour me another." He always did understand our industry better than I did.

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