Low carbon credit performance 2015-2020

11 minute read

Low carbon has produced stable excess returns versus traditional credit - we provide an out-of-sample, apples-for-apples examination using S&P indices based on the ECOBAR allocation model.

Low carbon credit has performed in-line with traditional credit in Q4 2020 and the start of 2021, following a strong relative run in the first three quarters of 2020. The average annual excess return of the low carbon portfolio has been 36 basis points, with a Sharpe ratio of 1.51, since inception in September 2015.

Note that this is an apples-for-apples, market neutral comparison avoiding some of the quantitative pitfalls commonplace in comparing "green" vs other portfolios. The portfolios have identical sets of issuers but is just adjusting portfolio weights to less carbon-intensive issuers, using both between and within sector scorings, as per the ECOBAR methodology.

The ECOBAR system is generally less restrictive and more flexible than exclusion-based ESG strategies, for example allowing traders to increase positive impact (scoring) through shorting underperformers and adjusting for term-structure effects in credit. ECOBAR scoring posits an exponential increase in scores for high-carbon emitters and the index implementation adjusts weights on individual index positions.