Decarbonization Factors

September 2019

Going with the flows on low-carbon strategies improves investor returns.

With growing concerns around climate change, are institutional investors moving money into low carbon strategies? And if so, how can investors approach decarbonization in an economically productive and efficient way? To find this answer, we measure how institutional money, in aggregate, is flowing around this theme by constructing six low carbon strategies called “decarbonization factors.”

After controlling for a range of other traditional factors, we find that between 2009 and 2018 the decarbonization factors that maximized carbon reduction also delivered the highest alpha. Additionally, since not all factors perform well all of the time, there is an attractive opportunity for investors to rotate across different strategies – implementing tilts at the sector, industry or firm level across multiple regions – to get continuous exposure to low carbon portfolios with more attractive return profiles.

As the first study to directly examine institutional flows into and out of decarbonization factors in addition to their impact on alpha, this research opens a door for new insights.