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September 29, 2021

Beyond Virtue Signaling: Financial Materiality of Carbon Emissions

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September 29, 2021

Beyond Virtue Signaling: Financial Materiality of Carbon Emissions


Convergence

Beyond Virtue Signaling: Financial Materiality of Carbon Emissions

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September 29, 2021

 
 

Companies create carbon emissions, both directly and indirectly, that cause harm to society. We believe that globally economic and regulatory policy changes are on the way which will aim to reduce green premiums (the additional cost of a clean technology alternative compared to traditional, higher emissions options) and thus increase the cost competitiveness of sustainable options. We anticipate that the burden and liability of emitting carbon will ultimately fall on companies, and that the fundamental analysis that investors do today needs to reflect a price on carbon.

At Counterpoint Global, our US-based strategies are comprised of companies that create fewer emissions per revenue dollar than the companies in the benchmark. For example, the carbon emissions per revenue dollar in the Growth Portfolio is less than half of the benchmark, while the carbon intensity estimate of the portfolio, the emissions per invested dollar is roughly one-fifth the index. As a result, our clients tend to have significantly less exposure to carbon intensity per invested dollar than they would if they invested in the benchmark.

 
 

Our analysis of carbon emissions provides a signal to companies and clients that we are factoring in these costs as part of our analysis and valuation. Executives and boards who know that active managers are quantifying the risks of carbon emissions may have more of a financial incentive to allocate corporate resources to the innovations that we need to decarbonize as a society.  We believe that the next wave of sustainability investing is to partner with companies to unlock opportunities for favorable impact. We call this convergence: the alignment of long-term value creation and positive impact on society and the environment.

Click on the PDF to learn more about our methodology and framework which help show how our clients can benefit from the many opportunities that a low-emissions world could create.

 
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Counterpoint Global consists of 42 people, including 21 investors, five disruptive change researchers, two consilient researchers and two sustainability researchers. Counterpoint Global’s culture fosters collaboration, creativity, continued development, and differentiated thinking.
 
 
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7 key findings emerged when we asked asset owners about their views on sustainable investing.
 
 
 

Risk Considerations

There is no assurance that a Portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the Portfolio will decline and that the value of Portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this Portfolio. Please be aware that this Portfolio may be subject to certain additional risks. In general, equities securities’ values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, market and liquidity risks. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed countries. Privately placed and restricted securities may be subject to resale restrictions as well as a lack of publicly available information, which will increase their illiquidity and could adversely affect the ability to value and sell them (liquidity risk). Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks. Illiquid securities may be more difficult to sell and value than public traded securities (liquidity risk).

ESG Strategies that incorporate impact investing and/or Environmental, Social and Governance (ESG) factors could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. As a result, there is no assurance ESG strategies could result in more favorable investment performance.

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