Turning Green Into Gold Takes a Leap of Faith

The climate crisis has provoked a debate about whether asset managers should disinvest from the most polluting companies or use their influence as shareholders to persuade firms to curb their carbon emissions. Unfortunately, the paucity of reliable and standardized data makes assaying the likely profit and loss of greening portfolios a thankless task, as two conflicting reports in recent weeks highlight.

For the sake of the planet, there is one conclusion I hope is correct.

Analysts at UBS AG have analyzed the shareholdings of more than 10,000 institutions including pension funds, mutual funds and hedge funds, with combined assets of more than $50 trillion. They’ve screened that pool for investors with large stakes in low carbon-intensity firms, as measured by the ratio of carbon emissions to sales.

The analysis then cross-referenced those results to identify companies mostly owned by long-term investors with a preference for greener assets, deeming them to be “more likely to be influenced by their shareholders and improve their carbon intensity.” The dissection found that companies most likely to come under shareholder pressure reduced their carbon intensity by 18% in the five years to 2020, compared with an 8% decline for those under the weakest institutional clout.

And there’s money to be made in backing the companies most exposed to institutional cajoling over their polluting behavior. UBS estimates buying a portfolio comprising those stocks would have delivered 40 basis points a year more than the MSCI World Index in the past decade, and outpaced a basket of shares under weaker pressure to change their planet-harming ways.

As ever in the world of environmental, social and governance standards, it’s not hard to find opposing evidence to the UBS findings. The EDHEC Business School’s Risk Institute, for example, argued last month that institutional ownership has little effect in curbing greenhouse gas emissions by companies.