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Low Carbon Index Strategies

Climate change is now increasingly recognized as a major financial threat. Along with leading institutional investors and key partners, Amundi has developed simple dynamic investment strategies that allow long-term passive investors to hedge climate risk without sacrificing financial returns. FRR and AP4 have committed respectively up to  €1bn on tracking the MSCI Low Carbon Leaders Indices, which Amundi contributed to design, and ERAFP is working with Amundi to decarbonize a €750MM equity portfolio.

  • Combining Low Tracking Error and Low Carbon exposure

Carbon intensive assets can be defined as stocks with a high carbon footprint, that is stocks with a high level of emissions (per unit of sales), or stocks whose valuation depends on fossil fuel reserves. Those are the assets which are the most at risk in the event of drastic climate mitigation policies.  However, if climate change mitigation policies cannot be waived off as a zero probability risk, there is a high uncertainty as to the timing and consistency of these policies. Not only carbon intensive assets could be impacted by climate change mitigation policies, but the possibility of a technological innovation breakthrough in clean energy also increases the risk for investors exposed to these assets.

Traditional green indices, which are either pure-play indices with a focus on renewable energy and clean-technology, or indices which fully divest from entire highly polluting sectors such as Energy or fossil fuel Utilities, are presenting strong sector bets that can affect investors’ performance relative to broad equity exposure. To answer to the needs of mainstream investors, who want to lower their carbon risk exposure but still care about their financial performance in the short and medium term, Amundi has designed Low Tracking Error Low Carbon Exposure strategies. Rather than enabling to take a bet on clean energy or on specific sectors, these strategies offer a hedge against carbon risk. By investing in these strategies, investors hold in effect a “free option on carbon,” they are able to obtain the same returns as on a benchmark index in a “business as usual” scenario, and should outperform the day carbon intensive companies are penalized.

  • An innovative family of Low Carbon Indices

Fourth Swedish National Pension Fund AP4 and French FRR (Fonds de Réserve pour les Retraites), together with Amundi, have assisted MSCI with the launch of a Global Low Carbon Leaders Index series. These innovative indices are the first in the industry to address the two dimensions of carbon exposure – carbon emission and fossil fuel reserves – while minimizing the tracking error compared to the performance of standard indices. Amundi has acquired licence to create index-tracking solutions based on these indices with seed investments from AP4 and FRR. Amundi is also about to launch funds tracking the MSCI World Low Carbon Leaders Indices and the MSCI Europe Low Carbon Leaders. On every region, the Low Carbon Leaders strategies allow to substantially reduce carbon emission and carbon reserves intensities (by more than 50%). Despite the fact that these strategies are forward looking, Low Carbon Leaders Strategies have slightly outperform their respective benchmarks so far.

  • In-house solutions to decarbonize equity portfolios

ERAFP, l’Etablissement de Retraite Additionnelle de la Fonction Publique, is working with Amundi to lower the carbon intensity of a €750MM equity portfolio by around 40%. This innovative process gives a good illustration of Amundi’s capabilities to develop tailored approaches, applying carbon reduction methodology with full flexibility to incorporate and apply clients’ specific constraints. Amundi is able to decarbonize, in-house, any standard indices with customized methodologies and Low Tracking errors, leveraging on Amundi’s key strengths in ESG analysis, quantitative research and indexing capabilities.

  • A decarbonization coalition supported by the UN

Along with AP4, the United Nation Environment Programme and its Finance Initiative (UNEP/FI), and the global environmental disclosure system CDP, Amundi is a founding member of the Portfolio Decarbonization Coalition (PDC). With the recognition of UN Secretary General Ban Ki-moon, the Coalition has pledged to reduce the carbon footprint of institutional investors’ portfolios in the amount of up to US$100bn by December 2015. With this initiative, Amundi is at the forefront of the climate theme in the run up to the 21st Conference of the Parties on Climate Change (COP 21) to be held in Paris in December 2015.

 

WATCH THE VIDEO

 

  

 

 

 

Focus on MSCI Europe Low Carbon Leaders Index 

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Low TE in an uncertain world

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Past performance is  not a reliable  indicator of future results or a guarantee of  future returns.

Laurent TROTTIER, CFA, Global Head of Index Management & Smart Beta
Alessandro RUSSO, CFA, Head of Equity Quant Research at Amundi
Frédéric SAMAMA, Deputy Global Head of Institutional Clients

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Low Carbon Index Strategies
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