Asian equity investors face higher climate risk

Bali, 13 December: Investors in Asian equities face higher levels of climate risk than investors in other regions, according to new research commissioned by the International Finance Corporation (IFC). But the research found that the carbon-intensity of Asian equity funds can be reduced by around 30% without any loss of financial performance.

“Asian listed companies are much more carbon-intensive than their counterparts in the US and Europe,” said Peter de Graaf, of London-based environmental research company Trucost, which carried out the study. “Investors are therefore much more exposed to policies to reduce carbon emissions.

“But there is very little correlation between the carbon intensity of a fund and its returns,” he said at the launch of Carbon Counts Asia 2007 on Tuesday at the UN climate change talks in Bali.

The IFC, part of the World Bank Group, commissioned Trucost to examine the carbon intensity – the volume of greenhouse gas emitted for each million dollars of turnover – for the MSCI Asia ex-Japan index, and 90 individual investment funds.

On average, companies in the index produced the equivalent of 621 tonnes of carbon dioxide (CO₂e) per million dollars of turnover, compared with 427t in the S&P 500 and 360t in the MSCI Europe.

This higher intensity is partly explained by the higher weighting of the basic resources sector in the MSCI Asia ex-Japan, but also by the fact that Asian companies in this sector are more carbon-intensive than their peers elsewhere.

The report found a wide range of carbon intensity in the funds analysed, with the carbon footprint of the most carbon intensive – 8,950 tCO2e/$1 million – almost 90 larger than the least.

Trucost also constructed a “carbon-optimised” portfolio, maintaining the same sector-weighting of the index, but emitting 31% less carbon. When back-tested from 31 December 2006 to 20 November 2007, the portfolio underperformed by just -0.045% with a tracking error of 0.23%.

The report noted that Asian countries are coming under greater pressure to control their emissions growth, with emissions trading schemes planned in Taiwan and South Korea. “As companies are increasingly required to bear the costs of carbon, those with less efficient carbon use are likely to see profit margins narrowed,” it said.

Rachel Kyte, IFC director of environmental and social development, said that the IFC is “now looking for partners to build investment products that provide exposure to Asian economies with very low carbon intensity.”