Climate Solutions Investments

Abstract

An increasing number of companies are providing products and services that help reduce carbon emissions in the economy. We develop a methodology to identify those companies and create a sample of publicly listed climate solutions companies allowing us to study their geographic composition, accounting fundamentals, valuation ratios, and stock performance over time. The sample is equally split between developed and emerging markets with more companies located in China rather than the US or the EU. A portfolio of climate solutions companies exhibits higher revenue growth, higher investments in research and development, and talent and lower profitability margin. The portfolio exhibits superior stock market performance since 2018, driven by solutions in energy, fuels, battery, and transportation. Finally, the portfolio’s returns exhibit very little correlation with the returns of portfolios that seek to reduce their carbon emissions by underweighting high carbon emission companies, suggesting that climate solutions portfolios are distinct from low carbon emission indices.

Keywords: climate change, decarbonization, climate solutions, innovation, carbon emissions, portfolio construction