francefr
Reducing the carbon intensity of multi-factor credits strategies

Reducing the carbon intensity of multi-factor credits strategies

27-05-2020 | Vision
Quantitative investment strategies lend themselves well to integrating secondary objectives, such as reducing carbon intensity. We find that reducing the carbon intensity of the multi-factor strategies comes with only a limited reduction in outperformance.
  • Robbert-Jan 't Hoen
    Robbert-Jan
    't Hoen
    Researcher
  • Patrick  Houweling
    Patrick
    Houweling
    Head of Quant Credits

Speed read

  • Large differences in carbon intensities across the investment universe
  • Carbon constraint has little impact on expected performance of strategies
  • Portfolios tilt away from (companies within) carbon-intensive sectors

Integrating a carbon constraint in multi-factor credit and high yield strategies

Our research into sustainability integration in quantitative investment strategies shows that such strategies lend themselves well to integrating secondary objectives, such as reducing carbon intensity, next to the primary objective of realizing attractive risk-adjusted returns. This is due to the large investment universe that the strategy can screen for the most attractive opportunities.

If a company with high carbon emissions issues a bond with attractive factor scores, the portfolio construction algorithm is often able to find a bond with similar factor scores, but with lower carbon intensity. This efficiently tilts the portfolio towards bonds of more sustainable companies, without having to forgo a lot of factor exposure.

We assessed the performance impact of imposing a constraint on the carbon intensity of our global multi-factor credit and global multi-factor high yield strategies, over a 1994-2019 backtest period. The constraint specifies that the weighted average carbon intensity of the portfolio should be lower than that of the benchmark. The impact on the backtested performance is limited to a few basis points per annum. We have also researched more ambitious carbon reduction targets, e.g. 10% lower carbon intensity than the benchmark, or 20%, 30%, etc., and found that these are associated with modest reductions in the expected outperformance of the strategies.

Maintenant, suivez-nous aussi sur Instagram
Maintenant, suivez-nous aussi sur Instagram
Suivez

Only a limited reduction in outperformance

One may wonder why reducing the carbon intensity of the multi-factor strategies comes with only a limited reduction in outperformance, even though imposing constraints in a factor strategy generally leads to lower factor exposures. We think there are three reasons for this:

  1. The distribution of carbon intensity is right-skewed, so that avoiding only a few of the most carbon-intensive companies results in a relatively large reduction in the weighted average carbon intensity of the portfolio.

  2. For large periods, the portfolios already have a lower carbon intensity than their benchmark, so that no adjustments need to be made in those periods.

  3. In the periods that the carbon intensity of the portfolios is higher than their benchmark, the large investment universe often enables the portfolio construction algorithm to replace bonds from companies with high carbon emissions with bonds that have similar factor scores, but lower carbon intensity. This efficiently tilts the portfolio towards bonds of more sustainable companies, without having to forgo a lot of factor exposure.
We believe that the described approach helps to reduce transition risks in the portfolio, while still providing attractive risk-adjusted returns.

Download the white paper with the detailed findings

Disclaimer

Ce rapport n'est pas disponible pour les utilisateurs des pays où l'offre de services financiers étrangers n'est pas autorisée, tels que les ressortissants américains.

Vos informations ne sont pas partagées avec des tiers. Les présentes informations sont destinées exclusivement aux investisseurs professionnels. Toutes les demandes sont vérifiées.

Logo

Information importante

L’information publiée dans les pages de ce site internet est plus particulièrement destinée aux investisseurs professionnels.

Certains fonds mentionnés dans le site peuvent ne pas être autorisés à la commercialisation en France par l’Autorité des Marchés Financiers. Les informations ou opinions exprimées dans les pages de ce site internet ne représentent pas une sollicitation, une offre ou une recommandation à l’achat ou à la vente de titres ou produits financiers. Elles n’ont pas pour objectif d’inciter à des transactions ou de fournir des conseils ou service en investissement. Avant tout investissement dans un produit Robeco, il est nécessaire d’avoir lu au préalable les documents légaux tels que le document d’information clé pour l’investisseur (DICI), le prospectus complet, les rapports annuels et semi-annuels, qui sont disponibles sur ce site internet ou qui peuvent être obtenus gratuitement, sur simple demande auprès de Robeco France.

Nous vous remercions de confirmer que vous êtes un investisseur professionnel et que vous avez lu, compris et accepté les conditions d’utilisation de ce site internet.

Je n’accepte pas