Lowering your portfolio’s carbon footprint

This is a sponsored article from Amundi, a supporter of Room151

Frederic Samama provides a guide to climate change risk and reducing the carbon footprint of investment portfolios

Climate change is increasingly recognized as a major financial threat. Along with leading institutional investors and key partners, Amundi has developed simple, dynamic investment strategies that allow long-term passive investors to hedge climate risk without sacrificing financial returns.

Low Carbon exposure to hedge a major financial risk
Carbon-intensive assets are stocks of companies with a high carbon footprint, or stocks whose valuation depends on fossil fuel reserves. Those are the assets which are most at risk in the event of drastic climate mitigation policies. The possibility of a technological innovation breakthrough in clean energy also increases the risk for investors exposed to these assets.

Yet, these risks are rarely reflected in asset prices. As investors increasingly recognize these risks, portfolio allocation strategies need to be adapted accordingly. Until recently, there were few scalable solutions available to investors seeking to address the financial risk of climate change and carbon exposure. Amundi’s Low Carbon strategies aim to offer a hedge against carbon risk combined with a low tracking error. By investing in these strategies, investors are able to obtain the same returns as on a benchmark index in a “business as usual” scenario, and should outperform once carbon intensive companies are penalized.

Amundi: A pioneer in the creation of low carbon investment solutions
Last September, Amundi cooperated with MSCI for the launch of a Low Carbon Leaders Index series, together with two major European pension funds seeking efficient index solutions to reduce their portfolios’ carbon footprint. These innovative indices are the first in the industry to address two elements of carbon exposure – carbon emission and fossil fuel reserves – while minimizing the tracking error compared to the performance of standard indices.

Amundi offers a product range with lower carbon exposure comprising one ETF and two Index funds:

• AMUNDI ETF MSCI WORLD LOW CARBON UCITS ETF tracking the MSCI World Low Carbon Leaders strategy index
• AMUNDI INDEX EQUITY GLOBAL LOW CARBON replicating the MSCI World Low Carbon Leaders
• AMUNDI INDEX EQUITY EUROPE LOW CARBON replicating the MSCI Europe Low Carbon Leaders

In every region, the Low Carbon Leaders strategies reduce carbon emission and carbon reserves intensities by more than 50%¹. Despite the fact that these strategies are forward looking, Low Carbon Leaders Strategies have slightly outperformed their respective benchmarks so far.

In-house solutions to decarbonize existing portfolios
In addition to low carbon indices replication, Amundi has 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 commitment to address client investment needs effectively. Amundi is able to decarbonize, in-house, any standard index with customized methodologies and Low Tracking errors, leveraging on Amundi’s key strengths in ESG analysis, quantitative research and indexing capabilities.

A decarbonization coalition supported by the UN
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 US$100bn by December 2015. With this initiative, Amundi is at the forefront of the climate change theme in the run up to the 21st Conference of the Parties on Climate Change (COP 21) which is paramount to the development of environmentally sustainable investment solutions.

¹ For further information about the methodology of the indexes, please refer to the prospectus or to the website www.msci.com

Frederic Samama is deputy global head of institutional and sovereign clients, Amundi Asset Management

*For professional investors only. 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.