Beyond Virtue Signaling: Financial Materiality of Carbon Emissions

Sep 29, 2021

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Companies create carbon emissions, both directly and indirectly, that cause harm to society. We believe that globally economic and regulatory policy changes are on the way which will aim to reduce green premiums (the additional cost of a clean technology alternative compared to traditional, higher emissions options) and thus increase the cost competitiveness of sustainable options. We anticipate that the burden and liability of emitting carbon will ultimately fall on companies, and that the fundamental analysis that investors do today needs to reflect a price on carbon.

At Counterpoint Global, our US-based strategies are comprised of companies that create fewer emissions per revenue dollar than the companies in the benchmark. For example, the carbon emissions per revenue dollar in the Growth Portfolio is less than half of the benchmark, while the carbon intensity estimate of the portfolio, the emissions per invested dollar is roughly one-fifth the index. As a result, our clients tend to have significantly less exposure to carbon intensity per invested dollar than they would if they invested in the benchmark.

Our analysis of carbon emissions provides a signal to companies and clients that we are factoring in these costs as part of our analysis and valuation. Executives and boards who know that active managers are quantifying the risks of carbon emissions may have more of a financial incentive to allocate corporate resources to the innovations that we need to decarbonize as a society. We believe that the next wave of sustainability investing is to partner with companies to unlock opportunities for favorable impact. We call this convergence: the alignment of long-term value creation and positive impact on society and the environment.

Click on the PDF to learn more about our methodology and framework which help show how our clients can benefit from the many opportunities that a low-emissions world could create.

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Risk Considerations

There is no assurance that a Portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the Portfolio will decline and that the value of Portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this Portfolio. Please be aware that this Portfolio may be subject to certain additional risks. In general, equities securities’ values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, market and liquidity risks. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed countries. Privately placed and restricted securities may be subject to resale restrictions as well as a lack of publicly available information, which will increase their illiquidity and could adversely affect the ability to value and sell them (liquidity risk). Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks. Illiquid securities may be more difficult to sell and value than public traded securities (liquidity risk).

ESG Strategies that incorporate impact investing and/or Environmental, Social and Governance (ESG) factors could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. As a result, there is no assurance ESG strategies could result in more favorable investment performance.

DEFINITIONS

“ESG” investment: Environmental Social and Governance based investment is an investment approach which takes explicit account of the environmental, social and corporate governance aspects of all proposed investments. Tangible investments are those investments made in something that has physical substance, such as hard or real assets or personal property. Intangible asset is an asset that is not physical in nature. Goodwill, brand recognition and intellectual property, such as patents, trademarks, and copyrights, are all intangible assets.

INDEX DEFINITIONS

The Russell 1000® Index is an index that measures the performance of the 1,000 largest companies in the Russell 3000 Index. The Russell 1000® Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000® Index companies with higher price-to-book ratios and higher forecasted growth values. The Russell 1000® Index is an index of approximately 1,000 of the largest U.S. companies based on a combination of market capitalization and current index membership. The S&P 500® Index measures the performance of the large cap segment of the U.S. equities market, covering approximately 75% of the U.S. equities market. The Index includes 500 leading companies in leading industries of the U.S. economy.

The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index.

IMPORTANT INFORMATION

The views and opinions are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively the Firm”), and may not be reflected in all the strategies and products that the Firm offers.

This material is for the benefit of persons whom the Firm reasonably believes it is permitted to communicate to and should not be forwarded to any other person without the consent of the Firm. It is not addressed to any other person and may not be used by them for any purpose whatsoever. It expresses no views as to the suitability of the investments described herein to the individual circumstances of any recipient or otherwise. It is the responsibility of every person reading this material to fully observe the laws of any relevant country, including obtaining any governmental or other consent which may be required or observing any other formality which needs to be observed in that country.

This material is a general communication, which is not impartial, is for informational and educational purposes only, not a recommendation to purchase or sell specific securities, or to adopt any particular investment strategy. Information does not address financial objectives, situation or specific needs of individual investors.

Any charts and graphs provided are for illustrative purposes only. Any performance quoted represents past performance. Past performance does not guarantee future results. All investments involve risks, including the possible loss of principal.

Prior to making any investment decision, investors should carefully review the strategy’s / product’s relevant offering document. For the complete content and important disclosures, refer to the article PDF.