Concerns over US President Donald Trump's effect on low carbon-related industries appear to have been overplayed, as MSCI's low carbon indices have outperformed their counterparts since his US election victory last November.
Throughout his election campaign, Trump said he would "cancel" the Paris Agreement and US Climate Action plans, stop US support for UN global warming programmes, while advocating wanting to "save" the coal industry.
However, it appears the President's bark has been worse than his bite, with the MSCI World Low Carbon Leaders (LCL) index outperforming the MSCI World by 24 basis points (bps), while the MSCI North America (NA) LCL index and MSCI Europe LCL index also achieved outperformance of 38bps and 27bps respectively against their regional peers, in the period between 8 November 2016 and 31 March 2017.
Over three years annualised the MSCI North America LCL index has returned 9.06% versus 8.86% for the MSCI North America index at 28 April 2017.
The LCL indices rank all stocks on their carbon footprint and their exposure to stranded assets (those that have suffered from unanticipated or premature write-downs, devaluations or conversion to liabilities), exclude 20% of the worst performers, and reinvest the proceeds into different sectors.
Frédéric Samama, deputy global head of institutional and sovereign clients at Amundi, said low-carbon industries' outperformance could be attributed to the poor performance of energy stocks, where the indices are slightly underweight, while being overweight financials.
Energy stocks' poor performance has come as a result of the falls in oil prices after US shale production increased far more than the market anticipated.
Additionally, Trump's promises of tax cuts and deregulation, such as repealing the Dodd-Frank Act, sparked a rally in financials, boosting the performance of low carbon indices where the sector makes up 17.7% of the MSCI NA LCL index, compared to 16.1% for the MSCI NA index.
Samama said: "The good news is that with the Trump victory, we thought many of the polluting companies would rally and we would lose some of the gains we have observed over the past years, but this has not been the case."
Another reason why Trump has had less of an effect on the LCL indices, Samana said, was attributable to investors having greater power than before.
"Had Trump been elected four or five years ago, he would have had a big impact because we still thought the solution for climate change was in the hands of the Chinese and the US President," he said.
"However, in a short period we have shifted from this policy driven approach towards a much more bottom-up approach, with investors having more of an impact."
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