ESG Indices, Green Hydrogen and Credit Spreads – #ESG Research Highlights

Editorial Team OpinioPro
By March 19, 2021 10:46

ESG Indices, Green Hydrogen and Credit Spreads – #ESG Research Highlights

ESG Indices, Green Hydrogen and Credit Spreads – #ESG Research Highlights

In a recent publication by DWS, forecasts are made for 10-year returns on ESG indices. These capital market assumptions are made to assist investors in constructing strategic long-term portfolios that keep in mind the traditional financial metrics and ESG impact metrics.

The construction of the forecasts is done incorporating the same three-pillar approach that DWS uses to construct its traditional indices. Which indicates that during the creation of these assumptions ESG has not been taken into account as an identifiable alpha factor.

Some points that long term ESG investors should keep into account are:

  • Equity returns for ESG indices are slightly higher across most equity regions while returns are broadly the same across fixed income asset classes.
  • The better performance of ESG indices is mostly attributed to buyback yields and lesser impediment from valuation normalization.
  • And, ESG equity indices trade on a higher multiple than their regular counterpart, however, this has been the case over the past decade and empirically EPS growth has been higher for companies with a higher ESG rating.

Last week, BNP Paribas Asset Management published an article named: “What technologies do we need to get to net zero?” in which they outline the measures that must be taken to meet the Paris climate agreements.

According to BNP Paribas AM, the first step to take is increase electrification and that electricity grids need to be decarbonised. For the sectors where electricity is not an option, other technology will be needed in the forms of either alternative fuels or capturing emissions.

BNP Paribas AM states that capturing carbon must be deployed in certain sectors where electrification is not an option due to the high heat requirements. Next to capturing carbon, alternative fuels should be used. BNP Paribas AM emphasises the difference between blue and green hydrogen here. Blue hydrogen will require a form of capturing and storing CO2 which does not seem like a promising solution according to them. The alternative that they deem most promising is green hydrogen which enables the gas to act as a vector for renewable electricity. The final point that BNP Paribas AM wishes to make is that technological development needs to be faster which will require an investment of between 1-2 trillion dollar a year according to the Energy Transitions Commission.

Last but not least, in a recent publication by Aegon Asset Management an analysis is done on credit spreads and sustainability. The analysis done by Aegon AM shows that companies improving their sustainability offer a higher-than-average spread when compared to sustainable leaders. Furthermore, leaders in sustainability provide downside protection in volatile markets which leads to the fact that combining these two may lead to an attractive risk-return profile in a sustainability themed fixed income portfolio.

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Editorial Team OpinioPro
By March 19, 2021 10:46

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