By Alexander Cheema-Fox, George Serafeim, and Hui (Stacie) Wang
Beyond carbon avoidance. A look at investing in firms with “pure-play” climate solutions.
An increasing number of companies are providing products and services that help reduce carbon emissions in the economy. We develop a methodology to identify “pure-play” climate solutions companies and construct portfolios from these companies. Our analysis reveals several insights. First, emerging markets have a significant presence in our sample — almost half of the companies are from emerging markets. Second, a portfolio of climate solutions companies exhibits higher revenue growth, higher investments in research and development, and lower profitability than the market portfolio. Third, climate solutions portfolios have outperformed the market in the most recent years, and the portfolios’ returns are uncorrelated with the returns of portfolios that seek to reduce carbon emissions by underweighting high carbon companies.
We hope our study provides investors examples of how to gain access to climate opportunities by building portfolios from pure-play climate solutions companies, as decarbonization is likely to accelerate in the coming decades.