Australia’s First Carbon-Neutral Equities Fund Delivers Gains of 24%

(Bloomberg) -- When AllianceBernstein set up Australia’s first carbon-neutral equities fund, it wanted to prove to investors you don’t have to forgo returns to safeguard the environment.

A year into the strategy, the $592 billion asset manager says benchmark-matching gains of more than 20% have proved its point.

“It’s allowing us to have a conversation about a very challenging issue, which is do you have to sacrifice returns in order to invest sustainably?” Jen Driscoll, chief executive officer for AllianceBernstein Australia, said in an interview. “It’s not an ‘either-or’, it’s an ‘and’. You can have both.”

The strategy, which Chief Investment Officer for Australian Equities, Roy Maslen, dubs “green alpha,” is derived from the AB Managed Volatility Equities Fund, which was set up in 2014.

The fund has 70% less carbon emissions than its benchmark, the S&P/ASX 300 Total Return Index, because it’s typically underweight cyclical stocks in industries such as fossil fuels, steel and cement, transport and mining, Maslen said.

The Green MVE strategy aims to keep emissions about 90% below the benchmark by further screening of stocks. Maslen calculates the cost of offsetting the remaining emissions and reaches third-party agreements to retire carbon credits. He estimates it costs investors about 6 basis points a year to take the extra step to carbon neutrality.

About 80% of Green MVE is invested in Australian shares and 20% in global equities. It doesn’t hold more than 5% in any stock and among its top 10 holdings are conglomerate Wesfarmers Ltd., Transurban Group, a Melbourne-based toll-road operator, and medical diagnostics firm Sonic Healthcare Ltd.

Tobacco companies, weapons manufacturers, coal companies and nuclear-power generation firms are excluded.

Maslen will keep stocks if a balance between returns and emissions can be struck. For example, the fund holds Rio Tinto Group, which is a more attractive investment from a climate perspective than BHP Group Ltd. after selling the last of its coal mines earlier this year, he said.

“If you are thinking about climate change, you don’t want to say ‘good company, bad company’ because if I draw the line in the wrong place I might give up investment return,” Maslen said. “We are saying ‘attractive investment, unattractive investment.’ So you can produce carbon emissions, you just need to be more attractive because we have to pay for that.”

AllianceBernstein isn’t alone in recognizing the correlation between low-volatility stocks and low-carbon emissions. Credit Suisse Group AG noted that such equities have a “lower negative sensitivity to climate change risk factors” in a 2015 research paper.

But its approach to reaching carbon-neutrality is likely unique in Australia, according to Helga Birgden, global business leader for responsible investment at Mercer.

Australia’s First Carbon-Neutral Equities Fund Delivers Gains of 24%

The managed-volatility fund has beaten 93% of its peers over the past five years, according to data compiled by Bloomberg. It has an annualized return of about 13% since inception in March 2014, according to the data. That compares to 8.5% per annum over the period for the S&P/ASX 300 Total Return Index, which accounts for reinvested dividends.

The Green MVE strategy had a total return of 24.15% as of Oct. 31 since inception in December 2018, according to AllianceBernstein. That’s in line with the 24.11% for the benchmark.

Green MVE now stands at just over A$200 million ($137 million), including a A$170 million mandate from NGS Super, an A$11 billion pension fund. The Australian government’s Clean Energy Finance Corp. committed A$50 million in its first investment in listed equities.

AllianceBernstein is now considering adopting the strategy elsewhere in the world, Driscoll said.

“The concept at a global level is being looked at from Australia into our global organization as well,” she said. “There is definitely a growing interest.”

©2019 Bloomberg L.P.

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