The Best Bang for Your Climate-Aware Buck (or Pound, Euro, Yen – You Name It)

With asset owners, companies and regulators worldwide increasing efforts to reach global climate targets, the transition to low-carbon portfolios is gathering pace.     

Qontigo’s latest whitepaper analyzes in which region a systematic decarbonization investment process can have the highest climate-reduction impact. One surprising finding of the study is that a US climate-aware portfolio has a lower carbon footprint than a European one — a result of the disconnect between traditional weightings in the equity market and its underlying economy. 

Paris-aligned benchmarks: US vs. Europe

The study, by Melissa R. Brown, Qontigo’s Global Head of Applied Research, used two regional STOXX Paris-Aligned Benchmark (PAB) indices, derived respectively from the STOXX® Europe 600 Index and the STOXX® USA 500 Index. 

Qontigo introduced the PAB indices last July, to meet — and exceed — the requirements in the new European Union Climate Benchmarks regulation. The PABs aim for a 60% reduction in greenhouse gas (GHG) emissions relative to the starting universe, and an additional 7% year-on-year reduction is required after the first year. 

Different profiles

The US starting benchmark is already less carbon-intensive than the European one.

“This was a counterintuitive observation given the fact that the US economy is itself more carbon-intensive,” said Brown. “Also, climate action has been a focus of European regulators, companies and investors for longer whereas US-based investors have been mainly concerned about the potential give-up in returns. Alas, our initial expectation was wrong!”

You can read the full paper here.