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Do You Know What is the Real Impact of Your Money?

Climate-warming potential of European stocks.
Making investment decisions is a direct way to vote on the future of our economy. Every individual participates in this voting machine, either directly through investment or pension accounts, or indirectly through banking or savings products.
Whether knowingly or not, our personal wealth allocation reflects our economic prospects, expected technological developments, and the future of our productive societies. It is through our money that we effectively decide on the use of fossil fuels, development of renewable energy technologies, greater equality, and many other options that solve major problems and create unique profit opportunities.
However, most people are not aware how is their money invested and what is the real impact of their investments. Whenever we open a financial account, we effectively appoint a financial intermediary to invest our savings for us through funds, banks, pension funds, or insurance products.
To uncover the real impact of wealth allocation in Europe, we have looked in detail at STOXX 600 index, which is a popular stock market index representing small, medium, and large European companies covering around 90% of European market capitalization. We use Globalance World screening tool (www.globalanceworld.com) to analyze investment portfolios and their real impact by 4 dimensions: climate warming impact, Globalance footprint measuring broad social and environment impact, megatrends for future positioning, and stock returns.
Source: Globalance World
Globalance analysis shows that European market does not impress in its impact record. Despite grand European vision for greater climate action, equality, and breakthrough technologies, large European companies in fact, contribute significantly to global warming, lag behind key technological innovations, and underperform financially.
European companies in STOXX600 create warming potential of 3.7°C compared to 2°C target. While their current ESG footprint is balanced, these companies are relatively weakly positioned for future growth drivers. Only 57% of their revenues are exposed to world’s main megatrends, and in 2020 they created negative return of -1.5%.
Another key stock index, US-focused S&P500, also fails to reach impact targets, but its performance is better over European STOXX 600. S&P500 companies contribute less to climate change, and have a significantly greater exposure to future megatrends, with 70% of its revenues exposed to key value drivers. Difference in financial returns is particularly staggering. S&P500 returned profit of 18.4% relative a loss of -1.5% of STOXX600.

STOXX600 Climate Warming Potential

Globalance World offers excellent tools to analyze and visualize portfolio impact. Warming Potential is based on a methodology, developed by MSCI Carbon Delta, to test your portfolios’ alignment against a 2°C long-term climate stabilization scenario. The global heatmap of portfolio climate warming portfolio impact shows that STOXX600 companies effectively contribute to warming across all countries around the world where they are active.
Source: Globalance World
Overall warming potential of STOXX600 is 3.7°C. 36% of the portfolio is has a warming potential of up to 10°C, but only 22% of the portfolio meets the target below 2°C.
Source: Globalance World
Breaking down the climate impact by selected companies, the highest warming potential is driven by industrials such as Total, BASF, and Air Liquid. On the other hand, least warming effect is produced by services and technology companies SAP, Zurich, and Schneider Electric. The size of the companies represents the weight in the portfolio and its shape represents ESG footprint discussed below.
Source: Globalance World

STOXX600 ESG Impact Footprint

STOXX600 is relatively balanced in its ESG footprint with the score of 57 out of 100. This footprint is measured by the Globalance Footprint index consisting of nine dimensions and scored on a scale of 0-100.
Source: Globalance World
The index scores highest in education and knowledge with score 76, followed by environmental resources & climate 68 and tax strategy 67.
Source: Globalance World

STOXX600 Megatrends Exposure

Megatrend exposure shows the share of revenues derived from one of the key drivers expected to make a major impact on the world economy. The overall percentage of STOXX600 is 57%, which is a relatively mediocre exposure.
Source: Globalance World
Source: Globalance World

Is There a Profitable Opportunity to Invest with Impact?

Since major stock indices fall short of meeting impact targets, is there an opportunity to invest in portfolios that can make both positive impact and profit? It turns out that such opportunities are extensive and can be highly rewarding.
One example is the personal investment portfolio of Swiss explorer Bernard Piccard. He is known for completing the first non-stop balloon flight around the globe, and the first round-the-world solar-powered flight.
It is no surprise that his private portfolio is heavily invested in ground-breaking technologies in digitization, knowledge society, and renewable energy. Moreover, 85% of the portfolio is invested in companies with high environmental, social, and governance rankings, having a low climate warming of 1.6°C, well below 2°C target. With key positive impact factors in place, this portfolio returned impressive 49.5% investment profit in 2020.
Mr. Piccard made his private portfolio available for anyone to analyze through Globalance World (www.globalanceworld.com).
Source: Globalance World

About the author:

Dr. Tilly has 19 years of executive experience in financial management in New York, Amsterdam and Hong Kong in the advisory roles in asset management and private equity industry. PhD in Finance from Rotterdam School of Management, Erasmus University.

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