Low-carbon Value Strategy?

Are there conflicts inherent in an investment strategy seeking to impose social preferences on a value style? In their May 2022 paper entitled “No Good Deed Goes Unpunished? Social vs. Investment”, Tzee-man Chow and Feifei Li investigate how a carbon reduction requirement affects construction and performance of a global developed market value stock strategy. They measure firm carbon emissions using end-of-year data from Institutional Shareholder Services (ISS), which supplements publicly available self-reported emissions with analyst reviews/estimates. They lag ISS data by three months and merge it with information for large and medium-sized stocks (top 86% of market value) in each country. Their benchmark value portfolio each year holds the market capitalization-weighted cheapest 10% of stocks based on composite valuation (average standardized book-to-price, cash flow-to-price and sales-to-price ratios and dividend yield). They then lower the carbon intensity of this portfolio via an iterative process of shifting weights from firms with relatively high carbon intensity to those with relatively low carbon intensity to achieve portfolio carbon intensities in the range 100% to 50% of that for the full universe. Using carbon emissions, valuation and price data for the specified stock universe during April 2016 through March 2021, they find that:

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