In 2015, Impax developed a new approach to managing climate change investment risk within equity portfolios, exploring the potential impairment to future cash flows of companies whose valuations are linked to fossil fuel assets (i.e. extractors of coal, oil and gas). We decided to avoid the popular approach of “carbon footprinting” as this typically fails to take account of a company’s pricing power, and may actually increase risk within the portfolio.
We have been running three model portfolios based on modifications to the MSCI World Index, which reduce exposure to fossil fuel Exploration and Production (“E&P”) companies by varying degrees. In order to preserve energy price (factor) exposure, we have replaced these holdings with Energy Efficiency stocks. The models have been rebalanced quarterly over the past 18 months in response to MSCI index weightings and updates to our proprietary fossil fuel risk analysis.
Over the past 18 months, reinvesting fossil fuel exposure in Energy Efficiency stocks has outperformed a “do nothing” approach.