Low carbon credit performance: equity and rates sell-off update

4 minute read

The September sell-off in equities and rates appears to only have very modest effects on the relative performance of the ECOBAR low carbon credit strategy.

We analyse correlations between that index and relevant macro markets. Equity and bond markets have experienced meaningful sell-offs in recent weeks, with the S&P 500 ending September down 5% versus its peak on 2 September (total return index) and the 10-year US treasury yield breaching 1.5% on 28 September in a 37-bp rise (in terms of total return). At the same time, our gauge of low-carbon relative performance has fallen “only” 5bp. Given the volatility in rates and equity markets in response, inter alia, to a more hawkish Fed, one should consider a near-flat performance quite resilient.

The low-carbon relative performance index currently stands at an outperformance of 1.9% in return terms over six years (no down years), or 31 bps per year, with an annualised Sharpe ratio of 1.38%.

We observe that S&P 500 total returns and the ECOBAR-based index are in fact nearly uncorrelated over the full six-year timeline of available data, suggesting that a low-carbon tilt of a corporate bond portfolio can add interesting diversification benefits in an asset allocation context.