Carbon exposure levels in institutional investor portfolios totaling US37 trillion reached a four-year high in March 2023 as rising energy company valuations swamped any emission-control downsides, a new State Street study reveals.
According to the just-released ‘State Street S&P Global Institutional Investor Carbon Indicator’ annual report, the total emissions exposure of portfolio companies captured by the data jumped by 8 per cent during the 12 months to March this year to reach 4.27 million metric tonnes – a level not breached since 2019.
At the same time, the ‘carbon intensity’ metric, which measures emissions against revenue, fell a further 10 per cent over the 12-month period: a lower intensity score indicates companies are more carbon-efficient.
“These contrasting moves represent, respectively a sharp reversal in the trend of declining exposures and a continuation of the trend in efficiency gains that we observed between March 2018 and March 2021,” the State Street report says. “The low emissions exposures of 2020 and 2021 were driven in part by global declines in emissions due to COVID restrictions, and these have reversed as the economy has recovered.”
Soaring energy prices largely explained the carbon exposure portfolio bump over the year as both flow and company effects – representing investor portfolio buy-sell decisions and corporate operational decisions, respectively – barely moved the dial either way.
And in spite of the aggregate outperformance of emission-heavy energy companies during the 12-month period, certain decarbonated investment portfolios also outperformed.
“This seeming paradox is due to the fact that sophisticated decarbonization strategies hold sector weights neutral and tilt toward more carbon-efficient firms within each sector,” the State Street report says. “For example, they might hold overall exposure to the Energy sector constant, but tilt toward more efficient emitters within that sector. As a result, they can benefit when energy prices rise since they are tilted toward companies that use energy more efficiently.”
The carbon indicator is one of three new institutional investor gauges launched by State Street last week based on anonymised data sourced from the group’s “more than US$37 trillion of assets under custody and administration”.
As well as the carbon counter, the US financial giant will publish monthly data detailing aggregate institutional investor asset class holdings and risk appetite (measuring fund flows), respectively.
Anthony Bisegna, State Street Global Markets head, said in a release: “In global markets, understanding how the world’s largest pools of capital are moving can help investors identify headwinds and tailwinds that will impact their portfolios both short and long term.
“For two decades, our clients have looked to us for data-driven flow research to help them manage assets. Today, we’re pleased to make these three bellwethers available to the media, policymakers and investors at large.”
The latest flow and holdings indicators suggest institutional investors are turning increasingly defensive but with more scope to pull back further given still-high equity exposures and historically underweight cash positions.