Climate Change Investment Risk: The “Smart Carbon” Methodology
In 2015, Impax Asset Management developed a new approach to managing climate change investment risk within equity portfolios, exploring the potential impairment to future cash flows of companies whose valuations are linked to fossil fuel assets (i.e. extractors of coal, oil and gas).
Impax has been running three model portfolios based on modifications to the MSCI World Index, which reduce Exploration and Production (“E&P”) exposure to varying degrees, and in order to preserve energy price (factor) exposure, replace it with Energy Efficiency stocks. The models have been rebalanced quarterly over the past 18 months in response to MSCI index weightings and updates to their proprietary fossil fuel risk analysis.
In this paper, Impax reports on the model’s continuing development and discuss why, over the past 18 months, reinvesting fossil fuel exposure in energy efficiency exposed equities has outperformed a “do nothing” approach.