Don’t get carbonised in the emerging markets

CO2_410Emerging-markets investors may unconsciously be running large risks by being over-exposed to carbon-intensive companies, according to new research from Trucost, the environmental risk consultancy, released last week.

Findings from a new study by Trucost show that emerging-markets portfolios are up to 60% more carbon-intensive than similar portfolios in the US and Europe. Furthermore, almost 80% of greenhouse gases from companies on emerging-market benchmark portfolios are emitted through their own operating activities.

These emissions could be subject to policy measures such as performance standards and carbon taxes proposed to achieve national emission reduction targets further to the Copenhagen accord. Under the Copenhagen accord, emerging-market countries, including major target markets for inward investment such as Brazil, South Africa, India and China, have set targets to reduce emissions by 2020. These could underpin a legally binding climate change agreement covering more than 80% of global greenhouse gas emissions at the UN climate change conference which will take place in Cancun in November.

According to Trucost, abatement costs to reduce just 4% of projected emissions could equate to more than 5% of earnings for 24 emerging-market companies in the utilities, resources, oil and gas, construction and travel sectors in 2013. Investors who are overweight in these kinds of carbon-intensive companies could then see their returns fall relative to benchmarks. With investors increasing allocations to emerging markets in the face of flat growth in developed markets, this could become a serious problem, for example for pension funds.

However, there is a solution in the form of a carbon-efficient index that Trucost has created in conjunction with the International Finance Corporation and Standard and Poor’s (S&P). According to Trucost, equity funds that overweight carbon-efficient companies using the new S&P/IFCI Carbon Efficient Index as a benchmark could reduce exposure to carbon emissions in emerging markets by as much as 22%.

“The S&P/IFCI Carbon Efficient Index currently tracks the financial performance of the S&P/IFCI LargeMidCap Index while reducing the portfolio’s carbon footprint, presenting a significant opportunity for investors to minimise risk from carbon regulation,” says Simon Thomas, chief executive of Trucost. “As we shift to a low-carbon economy and governments act to impose carbon costs on companies in these emerging economies, this Index should improve investors’ risk/return profile in emerging markets.”

Fiona Rintoul, editorial director
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