Low carbon credit performance: Mayday or opportunity?

3 minute read

Recent underperformance of low carbon credit has been subdued and the argument could be made that this is an opportunity.

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.