A confluence of regulatory and non-regulatory factors is driving the adoption of renewable energy and other clean energy technologies globally, while headwinds facing fossil fuels continue to mount. Measuring how one’s investments are positioned relative to this transition towards a low carbon economy can help the end investor understand what long-term bets – intended and otherwise – are embedded in their portfolios. This in turn may help investors adopt more resilient investment and risk management strategies in the face of long-term shifts in the global energy mix.
While most analysis to date has been at the company level, we turn our attention to funds to understand how different investment strategies are positioned against the low carbon transition.
In this paper, we introduce our Low Carbon Transition Matrix to help investors evaluate where their investments are positioned against four categories: 1) Asset Stranding, 2) Value Migration, 3) Transition Resilient, and 4) Potential Upside. We classify 5,737 US domiciled equity mutual funds into these categories.
· Close to 1,300 fund families with approximately 2.7 trillion USD in Net Asset Value were exposed to Asset Stranding risk, representing about 24% of the total Net Asset Value of the US domiciled equity funds based on Lipper classification. These funds were dwarfed by the 3,702 fund families with approximately 7.2 trillion USD in Net Asset Value that either have Potential Upside or are Transition Resilient.
· Although sector funds in Energy and Materials are, unsurprisingly, classified in the Asset Stranding category, we find considerable variation of exposure within each peer group.
· Top ranked Utilities Sector funds include Fidelity Telecom & Utilities Fund, Wells Fargo Utilities & High Income Fund, and Putnam VT Global Utilities Fund.
· Japanese equity funds had the highest exposure to companies providing low carbon solutions.
Read the full MSCI report here