Along with leading institutional investors and key partners, Amundi has developed innovative investment strategies that allow long-term passive investors to hedge climate risk without sacrificing financial returns.
A growing number of investors are more and more aware that climate change could have an impact both on the planet and on their investment returns, as they perceive an existing mispricing towards the risks related to it. With the aim of maximizing returns, many investors are now considering reallocating their capital in order to reduce the weight of carbon-intensive assets in their portfolios and hedge their returns towards correlated risks.
COMBINING LOW-CARBON APPROACH AND FINANCIAL PERFORMANCE
Carbon-intensive assets can be defined as stocks with a high carbon footprint, i.e. stocks with a high level of emissions (per unit of sales), or stocks whose valuation depends on fossil fuel reserves. Those are the assets which are the most at risk in the event of drastic climate mitigation policies. However, if climate change mitigation policies cannot be waived off as a zero-probability risk, there is a high uncertainty as to the timing and consistency of these policies. Not only carbon-intensive assets could be impacted by climate change mitigation policies, but the possibility of a technological innovation breakthrough in clean energy also increases the risk for investors exposed to these assets.
To answer the needs of investors willing to lower their carbon risk exposure but still caring about their financial performance, Amundi has assisted MSCI with the launch of a Low Carbon Leaders Index series. These strategy indices, rather than enabling to overweight clean energy or specific sectors, offer a hedge against carbon risk: they are, indeed, building track records that hedge the risk of future regulation at no cost, while paving the way for higher potential future returns. In the unlikely event that there turns out not to be any climate change impact, investment performance will match the benchmark. If climate change does take effect, the investment strategy can generate outperformance against the parent index.
AN INNOVATIVE FAMILY OF LOW-CARBON INDICES
The Low Carbon Leaders strategy indices are the first in the industry to address the two dimensions of carbon exposure – carbon emission and fossil fuel reserves – while minimising the tracking error compared to the performance of parent indices.
The indices, therefore, exclude one-fifth of stocks in their respective parent indices (MSCI Europe Index for the MSCI Europe Low Carbon Leaders Index and MSCI World Index for MSCI World Low Carbon Leaders Index), based on the “carbon emission intensity criteria”, which is defined as the weight of carbon emissions (tons of CO2) of a company relative to market capitalisation, with a maximum exclusion of 30% for each sector market capitalisation. They also exclude the largest owners of carbon reserves per dollar of market capitalisation, representing at least 50% of the reserves in the parent index.
So for instance, a heavily polluting transportation company that emits large amounts of CO2 per unit of revenue is more likely to be excluded than, say, more energy-efficient utilities. Likewise, companies where coal is an important contributor to revenue and/or assets will have a reduced weighting in the indexes. The 70% floor for any sector means investors do not completely exclude a sector, they reduce their exposure to it. In addition, the strategies retain a sectorial and geographical composition similar to the parent index.
Despite the fact that these strategies are forward-looking, the MSCI Europe Low Carbon Leaders Index even outperformed the MSCI Europe Index by 4.9% between November 2014 and September 2015, and the MSCI World Low Carbon Leaders Index outperformed the MSCI World Index by 3.4% between November 2014 and September 20151.
A FULL RANGE OF ACCESSIBLE SOLUTIONS
Amundi launched this year two open-ended index funds, the Amundi Index Equity Global Low Carbon and the Amundi Index Equity Europe Low Carbon and an ETF, the AMUNDI ETF MSCI WORLD LOW CARBON UCITS ETF, providing exposure to the MSCI Low Carbon Leaders indices.
In addition to index replication, Amundi has also developed an in-house “decarbonization” approach to lower the carbon intensity of existing equity portfolios. This innovative process gives a good illustration of Amundi’s capabilities to develop tailored approaches, applying carbon-reduction methodology with full flexibility to incorporate and apply clients’ specific constraints. Amundi is able to decarbonize, in-house, any standard indices with customised methodologies and low tracking errors, leveraging on Amundi’s key strengths in ESG analysis, quantitative research and indexing capabilities.
Amundi now manages more than €3.8bn in low-carbon equity strategies*.
A DECARBONIZATION COALITION
Amundi is a founding member of the Portfolio Decarbonization Coalition. With the recognition of UN Secretary General Ban Ki-moon, the coalition has pledged to reduce the carbon footprint of institutional investors’ portfolios by up to $100bn by December 20152.
Amundi is at the forefront of the climate theme in the run-up to the 21st Conference of the Parties on Climate Change (COP 21) to be held in Paris in December.
*End September 2015, Amundi ETF Indexing and Smart Beta.
Footnotes: 1. Source: MSCI at end of September 2015. Past performance is not a reliable indicator of future results or a guarantee of future returns.
2. Source: “United Nations and leading investors launch coalition to decarbonize institutional investment worldwide at UN Summit”, UN Environment Programme, 23 September 2014.
Investment in a Fund carries a substantial degree of risk. The price and value of investments can go down as well as up. Investors may not get back the original amount invested and may lose all of their investment.
For professional investors only. This document is not intended for citizens or residents of the United States of America or to any “US Person” , as this term is defined in SEC Regulation S under the US Securities Act of 1933 and in the Prospectus of the Amundi Index Equity Global Low Carbon, the Amundi Index Equity Europe Low Carbon and the AMUNDI ETF MSCI WORLD LOW CARBON UCITS ETF. This material does not constitute investment advice. The Funds are “fonds commun de placement” (collective investment schemes) authorised by the French Autorité des marches financiers (“AMF”) and are recognized collective investment schemes for the purposes of the UK Financial Services and Markets Act 2000 (the “Act”). The value of an investment and any income from it can go down as well as up and outcomes are not guaranteed. Investors may not get back their original investment. Past performance is not a guarantee or a reliable indicator of future results. For further details regarding the risks, please refer to the Key Investor Information Documents and the Prospectuses for the Funds. Issued by Amundi, an investment manager regulated by the AMF under n° GP 04000036. Registered office address: 90, Boulevard Pasteur 75015 Paris Cedex 15 – France – 437 574 452 RCS Paris. Important: the strategy indexes are not intended to exclude all the companies with carbon emissions but to reduce the representativeness of the latter relative to the composition of their parent indexes. In addition, each Strategy index will retain a sectorial and geographical composition similar to its parent index. Their construction is realized with the objective to get highly correlated performances to those of the parent indexes. Thus, the deviation of the geographical and sector weights of the strategy index compared to the parent index is limited to 2%.
The policy regarding portfolio transparency and information on the funds’ assets are available on amundietf.com. Indicative net asset value is published by stock exchanges. The Funds’ units purchased on the secondary market cannot usually be sold directly back to the Funds. Investors must buy and sell units on a secondary market with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current net asset value when buying units and may receive less than the current net asset value when selling them.
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