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

10 Pages Posted: 11 Jan 2019 Last revised: 19 Nov 2021

Date Written: January 15, 2019

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.

Suggested Citation

Deese, Brian and Kent, Michael and Van Nostrand, Eric and Wu, Lan-Chun Jennifer and Bertolotti, Andre and Akallal, Kenza, Investing in the Transition to a Low Carbon Economy: Exploring the Link Between a Company's 'Transition Readiness' and Financial Performance (January 15, 2019). Available at SSRN: https://ssrn.com/abstract=3311544 or http://dx.doi.org/10.2139/ssrn.3311544

Brian Deese

BlackRock, Inc

55 East 52nd Street
New York City, NY 10055
United States

Michael Kent (Contact Author)

BlackRock, Inc

55 East 52nd Street
New York City, NY 10055
United States

Eric Van Nostrand

BlackRock, Inc

55 East 52nd Street
New York City, NY 10055
United States

Lan-Chun Jennifer Wu

BlackRock, Inc

55 East 52nd Street
New York City, NY 10055
United States

Kenza Akallal

BlackRock, Inc

55 East 52nd Street
New York City, NY 10055
United States

No contact information is available for Andre Bertolotti

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