D.L.: “There are some pertinent takeaways from our findings on carbon beta and green innovation. In line with previous research2, we confirm in our paper that green innovation is driven primarily by the energy and materials sectors. Within these industries, the more innovative firms have lower carbon betas, although they do not necessarily have lower reported carbon emissions or emission intensities. In other words, investors should not just simply divest from these high carbon emitters as these ‘green innovators’ are essential for the energy transition. Therefore, holding these types of firms is likely to lower the climate risk of a portfolio.”
“We find that some companies that look ‘clean’ based on their low reported emissions data actually have a high carbon beta. For example, some smaller firms that provide services to the oil & gas sector do not have high-carbon emitting operations, but they are economically vulnerable to a low-carbon transition. By contrast, some businesses considered to be ‘high-polluting’ based on their high reported emissions data in fact have a low carbon beta as they are better prepared for the transition. For instance, this could be due to them actively researching green technologies. A good example is a US multinational that is active in the field of power generation. Despite ranking in the top 5% of greenhouse gas emitters in our sample, it is also one of the top three issuers of green patents. Thus, its carbon beta is among the lowest in the industrials sector.”
J.H.: “Alongside our climate strategist, Lucian Peppelenbos, we are currently investigating if carbon beta can function as an additional measure of climate risk within Robeco’s climate analytics toolkit. We believe carbon beta complements the current toolkit as it provides insights on carbon risk above and beyond those garnered from traditional carbon emissions data. Indeed, carbon beta has forward-looking information embedded in it, while carbon emissions data is backward-looking in nature. We also believe that the carbon beta metric can provide value for outlining portfolio climate risks. Whereas climate value at risk measures are based on complex, opaque models, carbon beta is a more intuitive, transparent and straightforward measure. Hence, we will also explore whether it can be integrated in Robeco’s investment strategies as a climate risk control.”
1 Huij, J., Laurs, D., Stork, P. A., and Zwinkels, R. C. J., November 2021, “Carbon beta: a market-based measure of climate risk“, SSRN working paper.
2 Cohen, L., Gurun, U. G., and Nguyen, Q., January 2021, “The ESG-innovation disconnect: evidence from green patenting”, SSRN working paper.
In defining sustainability, investors have a multitude of dimensions and metrics they could consider. For example:
ESG scores typically put more focus on the operations of a business, whereas SDG scores also incorporate the impact that the business' products and/or services have on society.
We see client sustainability objectives increasingly moving towards avoiding controversial businesses (values-based exclusions) and including those that provide sustainable solutions (impact investing). In the first few articles of our Indices Insights series, we will empirically show how the different sustainability metrics (negative screening/exclusions, ESG, SDG) relate to the increasingly impact-oriented client sustainability objectives.
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