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A Look at the Outperformance of the Carbon Efficient Index


Here, Michael Orzano, associate director of Global Equity Indices, and Alka Banerjee, vice president of Global Equity & Strategy Indices for S&P Indices, describe outperformance in the S&P/IFCI Carbon Efficient Index, driven by Trucost data.

The S&P/IFCI Carbon Efficient Index was designed to closely track the performance of the benchmark S&P/IFCI LargeMidCap Composite, but with index weight adjustments utilizing the Carbon Footprint metric1. In this regard, the S&P/IFCI Carbon Efficient Index was conceived as a “beta” product that would serve as a benchmark emerging market index for investors interested in reducing the carbon footprint of their portfolio. Over time, however, the S&P/IFCI Carbon Efficient Index has outperformed its underlying broad benchmark by a significant margin, suggesting that investments in companies with more carbon efficient operations may have some potential for generating alpha within the emerging markets.

Year-to-date through February 29, 2012, the S&P/IFCI Carbon Efficient Index has gained 18.27 percent on a total return basis, outperforming the 17.90 percent return of the S&P/IFCI LargeMidCap Composite by 37 basis points (bps). Likewise, since its December 10, 2009 public launch, the 23.43 percent cumulative return of the S&P/IFCI Carbon Efficient Index has outperformed that of the S&P/IFCI LargeMidCap Composite by 427 bps.

S&P/IFCI Carbon Efficient Index outperforming

While past performance is not a guarantee of future results, it is important to note that the level of performance noted above has been relatively consistent and not heavily concentrated in any particular period. Over the 27 monthly
periods since the index launch, there have been just eight months in which the S&P/IFCI Carbon Efficient Index has underperformed its benchmark. Furthermore, in five of these eight periods, the underperformance has been by 11or fewer bps.

Likewise, over the 19 monthly periods in which the S&P/IFCI Carbon Efficient Index has outperformed the benchmark, the monthly alpha has been less than 25 bps on ten occasions, between 25 and 50 bps on seven occasions and greater than 50 bps on just two occasions. The largest monthly differential has been 78 bps. Furthermore, outperformance has been demonstrated in 2010, 2011 and year-to-date through February 2012.

It may be impossible to draw any firm conclusions regarding the source of the alpha generation, particularly over a relatively short time period. However, the index design, which ensures that the country and sector weights of the S&P/IFCI Carbon Efficient Index mirror those of the S&P/IFCI LargeMidCap Composite at each annual reconstitution, does suggest that obvious sources of variation such as sector or country weight differences are most likely not the cause.

Sarah Wainwright runs Trucost’s information partner program which aims to support organizations in providing environmental information and guidance to their stakeholders. She holds a degree in Natural Sciences and Marketing from the University of Bath.

This article is reprinted from the Trucost blog with the permission of Trucost.

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