By Entelligent Research Team using AI tools
Climate change and the global energy transition have become central themes for investors over the past decade. A key question is whether public equity investments in climate-related themes – such as renewable energy, electrification, decarbonization technologies, and sustainable infrastructure – can deliver superior risk-adjusted returns in developed markets. Numerous academic studies and institutional analyses since 2020 have explored this, using both quantitative backtests and qualitative strategy perspectives. This report surveys the findings, covering historical performance of climate-themed portfolios, theoretical return drivers (the “greenium” vs. transition risk premium), and implications for investors. It is important to point out that these portfolios use a wide array of methodologies ranging from sector selection to carbon intensity screening and thematic investing. These various approaches do not perfectly align with Entelligent’s risk metrics allowing for true transition investing. After a cursory historical performance analysis, key studies are summarized in a comparative table, followed by implications for investors and the need for further research. The appendix covers regional differences across developed markets (mainly U.S. and Europe), and a discussion of methodologies. Here are the survey’s most important takeaways:
• “Green” investing does not guarantee outperformance, for instance as renewables stocks have been hurt by higher rates.
• Even in climate thematic investing, sectorial diversification matters as the market rotates from growth to value, and vice-versa, for instance.
• Climate risks have been historically underpriced, for instance for companies with high carbon footprint.
• Certain climate themed stocks can act as a ‘hedge’ by outperforming when climate risks are rising.
• “Green” methodologies try to measure the impact of companies on their environment, whereas transition-ready ones try to measure the impact of the transitioning economy on companies’ financial performance.
• These two approaches yield very different results: the former tends to increase the concentration risk of portfolios, while the latter has demonstrated more stable risk-adjusted performance.
• While not all the research papers surveyed in this review conclusively found the existence of an equity risk premia linked to transition readiness, an overwhelming majority did.
You can read the full article here.
