By Marlies Van Boven, managing director, research & analytics
As markets were rattled by the coronavirus pandemic and investors’ risk aversion spiked, how did climate-focused strategies fare?
To answer this question, we take a closer look at the FTSE All-World ex CW Climate Index. The objectives of this index are to: exclude companies that produce controversial weapons, decrease the weight of constituents based on their exposure to fossil fuels or carbon emissions, and increase the weight of constituents with green revenues.
We first review the long-term performance of the Index. As the chart below shows, between September 19, 2011 and April 5, 2020, the FTSE All-World ex CW Climate Index has outperformed the FTSE All-World by 3.7%. When we zoom in on the recent market sell-off we notice that the index has marginally outperformed the wider market during the recent period of extreme volatility. What were the drivers behind this performance?
Source: FTSE Russell, data from February 18, 2011 to April 5, 2020. Past performance is no guarantee to future results. Please see the end for important disclosures.
Assessing the impact of Covid-19 on the climate index
We examine the performance of the climate index from the peak to trough of the recent pandemic sell-off. Between February 19 and April 5, the FTSE All-World ex CW Climate Index has marginally outperformed the FTSE All-World by 0.32%. We can look at this from different perspectives, in particular the contribution from factor deviations and active Industry weights.
The index does not have any significant factor exposure and is only slightly tilted to large capitalization, low volatility stocks. Moreover, the Climate Index has a small negative Value exposure resulting from being underweight the Oil & Gas sector (driven by the reduction in fossil fuels exposure).
Investors’ flight to large cap low beta strategies during Q1 2020? caused large swings in the factor returns, benefiting the index 0.34 %. The climate tilts were marginally positive year to date – they added another 0.03% of excess performance.
Table 1. FTSE All-World ex CW Climate Excess Performance Attribution – February 19 to April 5.
Source: FTSE Russell, data from February 17, 2020 to April 5, 2020. Past performance is no guarantee to future results. Please see the end for important disclosures.
What is the impact of Industry positions on the performance of the indexes?
The largest active Industry weights in the FTSE All-World ex CW Climate Index are in Technology (OW) and Oil & Gas (UW). Being underweight the Oil & Gas sector has particularly benefited the excess performance, contributing 0.15%.
Chart 3. FTSE All-World ex CW Climate: Industry impact on performance
Source: FTSE Russell, data as of April 5, 2020. Past performance is no guarantee to future results. Please see the end for important disclosures.
To conclude the FTSE All-World ex CW Climate Index marginally outperformed during the recent market sell-off. Its strategy is to insulate against climate risks whilst providing exposure to opportunities over the medium to long term. To achieve this, the index underweights stocks with high exposure to fossil fuels and carbon emissions and overweights stocks with revenues from the green economy. Since 2011 this has resulted in almost 400bps of excess return versus the benchmark. So far this year, the resulting overweight in large cap, defensive stocks and underweight in the Oil & Gas sector has delivered a small excess return.
The FTSE Green Revenues Index Series is designed to obtain increased exposure to companies engaged in the transition to a green economy, based on FTSE’s Green Revenues data model, capturing changes in the revenue mix of companies as their business models shift to mitigate or remediate the impacts of climate change, resource depletion and environmental erosion.
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