Top executives are saying the word “carbon” on corporate earnings calls at a rapidly rising rate, in the latest sign of the increased importance investors place on environmental credentials.
Mentions of carbon and associated keywords have tripled over the past three years to about 1,600 per quarter, according to a UBS analysis of earnings call transcripts. Searches for the word in a financial context on Google have also reached an all-time high, according to the Swiss bank.
The increased emphasis on emissions of greenhouse gases such as carbon dioxide comes during a period of swift growth in investments based on factors such as the environment, governance and social impacts. Global sustainable fund assets climbed 18 per cent in the first quarter of 2021 compared with the final three months of 2020 to almost $2tn, led by strong inflows into Europe, Morningstar data show.
“Carbon emissions are high on the political agenda across many countries and investors are also increasingly thinking about this issue,” UBS said.
The UBS analysts also found that investing in a portfolio of companies across sectors and regions with lower emissions intensity — the amount of CO2 emitted per dollar of revenue — led to improved returns over the past decade compared with the broader market.
The low carbon intensity strategy generated returns of 11.6 per cent a year over the period, exceeding the MSCI World index of global developed market equities by 1 percentage point. Still, UBS noted the “strategy was somewhat inconsistent”.
The gains were driven in part because companies with strong emissions performance also tended to be more efficient in other ways, generating higher returns and profitability, UBS found.
But the momentum behind green investing itself also appears to be a big driver as accelerating flows of cash into low-carbon companies and funds have driven up valuations.
The bank said the momentum effect could drive outperformance “at times when public interest in carbon emissions is likely to increase”, such as during the COP26 climate summit in Glasgow later this year, when governments are expected to lay out more ambitious emissions reduction targets.
Critics have argued that ESG outperformance has been propelled by momentum alone rather than any underlying value.
If this is the case “the outperformance of low carbon may come to an end when interest in sustainability stabilises”, the UBS analysts said. “But we do not expect that to happen in the near future.”