Investing in the Transition to a Low Carbon Economy: Exploring the Link Between a Company's 'Transition Readiness' and Financial Performance

Abstract

This paper describes a new investment framework to assess public companies’ “Transition Readiness”, or preparedness for a transition to a global low-carbon economy. Unlike prior low-carbon research that focuses on carbon emissions as a source of potential risk, this five-part framework is designed to capture both a company’s potential risks and opportunities associated with the transition. We construct the Transition Readiness framework on a relative basis, whereby we identify companies we believe to be better prepared for the transition relative to their industry peers. While the framework is designed to enhance investment performance as the global economy transitions to lower-carbon usage, we find that a diversified portfolio of companies that exhibit superior Transition Readiness characteristics has recently outperformed an equivalent market benchmark on a risk-adjusted basis. Finally, we find that a Transition Readiness portfolio has lower carbon emissions intensity and greater exposure to clean technology revenue relative to the market benchmark.