Recent low carbon credit performance relative to standard credit has been negative but still relatively contained, as per our cash index studies based on the ECOBAR model and the S&P500 IG bond index.
On a duration neutral basis, one could argue that the underperformance has brought low carbon outperformance back to the pre-Covid long-term trend line. Pairing this technical ‘support’ level with an investment hypothesis that high-carbon news flow could turn slightly less positive – for example, we note various discussion around windfall taxes on energy companies – this might be a tactically opportune moment to increase relative exposure to low carbon credit.
Since our latest update, the carbon efficient (“low carbon”) cash bond index has underperformed the traditional counterpart by 4.7/34bps in spread/return terms, and on a fully duration and beta neutral basis. Indeed, the plain index differential actually turned in favour for the low-carbon investors over 2022, as the low-carbon index had a lower duration going into the recent sell-off.