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Integrating Low-Carbon and Factor Strategies in Asia What are the risk/return benefits of combining carbon efficiency and factors in Asian markets?
BY Akash Jain

EXECUTIVE SUMMARY



Low-carbon and factor-based investing are two key trends in the global investment management industry. This paper investigates the impact of low-carbon screening on traditional market-cap-weighted portfolios and factor portfolios (quality, value, momentum, and low volatility) across seven Asian markets: Australia, China, Hong Kong, India, Japan, South Korea, and Taiwan.



HIGHLIGHTS



•  The weighted average carbon-intensity scores of unconstrained carbon-efficient portfolios were at least 85% lower than their respective carbon-inefficient portfolios. Due to variation in carbon efficiency across sectors, unconstrained carbon-efficient portfolios resulted in significant sector biases.



•  Our analysis suggested that the implementation of simple carbon-efficient screening, either sector-neutral or unconstrained, resulted in significantly lower portfolio carbon intensity scores over the entire studied period, without sacrificing returns or penalizing targeted factor exposure across Asian markets across longer time horizons.



•  Carbon-efficient screening resulted in the highest weighted average carbon intensity reduction to low volatility and value portfolios across Asian markets. Carbon-efficient screening also improved risk-adjusted returns for the quality, value, and momentum portfolios, but lowered returns for the low volatility portfolio.



•  Sensitivity analysis of carbon screening of factor portfolios showed that even a subtle carbon-efficient screen (decile exclusion of companies with the highest carbon intensity scores) can lead to a significant reduction in portfolio carbon intensity scores while posing minimal impact on their returns.

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