Corporate Knights recently published Eco-Fund Ratings for 424 equity funds available to Canadian investors, 324 of which have at least a 3-year history. The Eco-Fund Rating was based on how funds performed relative to their fund category peers on two environmental factors: the weighted carbon intensity of each fund’s company holdings measured in tonnes of carbon emissions per million dollars in sales and the percentage of green companies in the fund’s portfolio.
In order to analyze the impact of both carbon intensity and exposure to green companies, we conducted explorative regression analyses using carbon intensity and exposure to green companies as variables that influence the 3-year compound return of the funds. The two environmental variables have been correlated with the financial return as single variables and in a multivariate regression that takes into account the impact of both variables in one function.
The analysis for all 330 funds with a minimum 3-year history in the sample for carbon intensity suggests that the 3-year compound return is significantly influenced by the carbon intensity of the fund. A decrease of one tonne of CO2e/$m sales increased the 3-year compound return by .1 per cent. In other words, a reduction of 100 tCO2e/$m sales increased the 3-year compound return by 10 per cent. The same is valid for an increase in tCO2e/$m sales. An increase of 100 tCO2e/$m sales decreased the 3-year compound return by 10 per cent. The regression function is statistically significant and is able to explain about 13 per cent of the funds’ volatility.
We also found that expanded exposure to green companies increased the financial returns. Increasing the percentage of green companies in the fund by one per cent increased the 3-year compound return by .2 per cent.
The regression analyses for the combination of both carbon intensity and exposure to green companies explained 15 per cent of the funds’ volatility. The result of the combined analysis suggests that a reduction of the carbon intensity by one tCO2e/$m and an increase of the exposure to green companies by 1 per cent increased the 3-year compound return by .2 per cent.
These results suggest a significant negative impact of carbon intensity and a significant positive impact of exposure to green companies on the 3-year compound return of the funds in the sample. However, we did find an anomaly: Canadian funds with more green exposure underperformed funds with less green exposure. This may be because the Canadian stock market has an extremely small pool of green companies (less than one per cent of its equities are classified as green), as compared to global indices that tend to have a pool of green companies five times bigger than in Canada, adjusting for size.
Carbon intensity and exposure to green companies influenced the 3-year compound return of funds significantly. Funds with lower carbon intensity and higher exposure to green companies had a significantly higher financial return. On the other hand, higher carbon intensity and lower exposure to green companies decreased the financial returns of equity funds.
For Canadian equity the situation was a bit different. The high carbon intensity of Canadian equity funds decreased their financial returns, but there were not as many Canadian green companies that create good financial returns (less than one per cent of the S&P/TSX Composite is comprised of green companies). This creates a dilemma for Canadian equity funds going forward: funds which decrease their carbon intensity to increase their financial returns have limited opportunities for investments in green companies.
It seems that Canadian investors are still too dependent on carbon intensive investments and that there is a need for more green companies in Canada.
Olaf Weber is a professor at the School of Environment, Enterprise and Development (SEED), University of Waterloo and Editor: Journal of Sustainable Finance and Investment.
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