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Boutique firm Alpha Centauri creates carbon ‘factor’ for series of low-carbon strategies

Hamburg-based firm teams up with climate data house South Pole

Alpha Centauri, the German boutique with €3bn under management, has created a carbon ‘factor’ in order to launch a series of low-carbon strategies, including a hedge fund offering.

The Hamburg-based investment manager, which specialises in factor investing, has teamed up with climate data house South Pole to create a strategy based on its findings that investors already pay a premium for carbon intensity in European equities.

Alpha Centauri used the same approach it uses for conventional financial factors – perceived performance drivers such as value, momentum and currency – to isolate the aspect of a company’s performance linked to its carbon exposure.

“We wanted to find out if there is a ‘carbon factor’ available: if capital markets are pricing carbon, and if so, how you capitalise on that,” said Ulf Füllgraf, Managing Director. Last year, the firm analysed the performance of European equities over a six-year period, based on carbon exposure. The time period was determined by the availability of carbon data.

“What we found is that companies with a lower carbon footprint performed better, even after eliminating all types of systematic risk such a geography, sector, conventional factors and currency. And conversely, carbon-intensive companies have underperformed. So it’s not just that the capital markets have priced carbon: it’s that lower exposure already receives a premium.”

Many of the ‘smart-beta’ strategies that have been launched around carbon to date focus on the future risks of carbon exposure (the potential introduction of carbon taxes, for example) – whereas this methodology seeks to prove historic risks as well.Alpha Centauri has created a series of investment strategies based on its research, which is published in a white paper: In Search for Climate Smart Investments – the Case of European Equities.

Alongside more traditional strategies like UCITS funds and indices, it will also offer a long/short strategy for hedge funds, which involves taking a ‘long’ position on between 60 and 120 low-carbon equities, while going ‘short’ on around the same number of carbon-intensive stocks.

“This approach contributes to the evolving discussion around how to achieve a negative carbon footprint in the investment world,” said Maximillian Horster, Director of Financial Industry Group at South Pole. “By shorting more emissions than you go long on, you can arguably have a negative carbon exposure.”

Horster added that this “has the potential to bring environmental, social and government into two huge mainstream worlds: hedge funds and factor investing”.

There are existing factor-based and hedge fund approaches to ESG, although they are all slightly different. Most recently, HSBC put a significant portion of its UK pension assets into a new index from Legal & General. This uses traditional factors – value, quality, volatility and size – and then overlays a carbon tilt. Finland’s ELVI also has a carbon factor-based offering. London-based Ecofin runs a Vista Long/Short Fund focused on climate, but with a broader ESG screen.
Auriel also offers a ESG-focused hedge fund.

The Alpha Centauri strategies are expected to be licensed to third-party asset managers and asset owners.