Low carbon index beats MSCI World over short run, showing promising signs

Index selection based on an aggregate of investment portfolios.

A low carbon index based on an aggregation of the portfolios of four asset managers is beating the MSCI World index over a three-month period both in financial and CO2 emissions performance.
The index, created by Cedrus Asset Management, the France-based sustainable investment specialist, is the first project to come out of a pioneering experiment inviting asset managers to run a dummy mandate of a portfolio of international equities with a low carbon footprint, that was originally set in December 2015 along with ERAFP, the 100% SRI additional pension fund for French civil servants: Link to RI story
The first three months’ reporting (July 20 – October 20, 2016) of the CAML Global Equities Low Carbon Index (CAML GLECI), sponsored by Société Générale and calculated by Germany-based index provider Solactive, was recently published by Cedrus: Link
The four asset managers are Allianz Global Investors, La Française Inflection Point, Roche-Brune and another unnamed French house.
The CAML index rose 1.80 percent for 101 selected stocks, while the MSCI World index, with over 1,600 constituents, finished its three-months’ performance with 1.04 percent.
In terms of carbon performance, the CAML GLECI index reached 60 tons of carbon emissions per million euro turnover, whereas the MSCI World index was nearly four times higher with 223.7 tons. The Cedrus index outperformed against MSCI ESG indicators, reaching a score of 6.1 points on a 10-point scale compared to the MSCI World with 5.4.
Cedrus says the aim of the index is to beat the MSCI World with sustainable, actively managed ESG portfolios. The results of the quarter reporting show the ambition is possible, albeit with market fluctuation and short time-frame caveats.Hugo Kaiser, product specialist at Cedrus, says: “We are very pleased with the results because the MSCI World index is one of the hardest to be beaten by every manager in the long term.” Every three months, Cedrus reviews the portfolios of the four asset managers with a weight set for each portfolio from a virtual IT platform. It then analyses the portfolio components using various performance and risk metrics and sets a final allocation of 100 stocks (out of 450) for the CAML portfolio. At the moment, the three-months’ reporting doesn’t reflect any correlation between financial profit and the reduction of carbon. But Kaiser says that Cedrus hopes that, in one or two years, after having collected enough data, the relationship between carbon intensity and financial returns will be possible to analyse.
In the initial dummy mandate experiment, ERAFP assigned amLeague, the Swiss-based manager ranking company, and Cedrus to set-up a virtual platform and a global low carbon mandate. The dummy mandate runs with paper portfolios only, but under real trading conditions. The virtual platform is public, showing the live performance of the active portfolio management of 25 asset managers and their low carbon criteria and financial performance: Link
The dummy mandate – soon reaching it’s first year of data – enables ERAFP to examine the ability of asset managers to reduce the carbon intensity of an international equity portfolio. France is spearheading the transition to a low carbon economy. Article 173 of the French energy transition law requires institutional investors and investment management firms to report on how they take ESG criteria into account, and contribute to fight climate change. Kaiser says: “If Article 173 is a success in France, we may see a stronger preference for low carbon stocks of the MSCI over high carbon stocks over time, which could indirectly impact our product, and our chance to beat the index would rise.”