In this report ET Index Research investigates the relationship between equity returns and carbon intensity. The results indicated that portfolios of low-carbon intensity stocks have outperformed portfolios of high-carbon intensity stocks, and that this outperformance is significant. This relationship is found to persist after controlling for other known risk factors.
In this report, ET Index Research investigates whether there is actually a systemic carbon risk factor now driving equity returns, in addition to the already known and accepted Market, Value, Size and Momentum factors. There is strong evidence for a carbon risk factor and it is labeled EMI (for ‘Efficient minus Intensive’). The EMI factor is found to attract a positive risk premium and to be uncorrelated with the other known risk factors.
This report by ET Index Research CTO & Head of Research, Jonathan Harris, focuses on three key questions for responsible investors: does responsible investment lead to outperformance or underperformance; can responsible investing actually impact company behaviour; what is the optimal way to allocate an investment portfolio in a responsible way?