The conflict in Ukraine and the West’s response has resulted in a shock to the financial system. The world is witnessing inflationary pressures not seen since the early 1980s, oil prices briefly topped $125 a barrel, Europeans are worrying about their energy dependency on Russian supplies, and even the price of wheat is skyrocketing.
Entelligent produces data that measures the impact of energy-price shocks precipitated by climate action—data useful for the sustainable asset manager or investor looking to reduce risk to their portfolio from environmental factors—and here comes along an energy price shock. How well does our data and system design hold up during this volatile period?
Lower Climate Risk Results in Better Performance
To study this, we looked at Société Générale’s (SocGen’s) SG Climate Control Index (SGIXCRC) to see how it has performed relative to the S&P 500. SocGen partnered with Entelligent to create SGIXCRC, a stock index comprised of the 250 stocks in the S&P 500 with the highest “E-Scores.” Entelligent’s E-Score measures and ranks each company by its sustainability of future profits under different climate scenarios. The less sensitive a company is to opposing climate change scenarios, the less risk and therefore the less volatility we would expect to see in a time of an energy shock.
Figure 1 shows that over the past year SGIXCRC has outperformed the S&P 500. SGIXCRC showed an 8.6% return over this period versus a 5.9% return for the S&P 500, despite the recent market correction. Over the past month, however, we capture the resiliency of SGIXCRC (Figure 2) compared to the S&P 500 for the recent energy shock. During this period, the S&P 500 lost more than 400 basis points compared to a loss of less than 100 basis points for the SGIXCRC.
Focus on the Energy, Utility, and Airline Sectors
How have key sectors of the S&P 500 been impacted by the recent market volatility? Using the first two weeks since the beginning of the conflict in Ukraine as a natural experiment, we compared stock market movements for large-cap U.S.-listed energy, utility, and airline stocks to the expected movements derived from our T-Risk model based on Bayesian estimates of market beta (leverage) to the price of oil.
Given the approximate 34% increase in the price of oil since Feb. 24, 2022 (WTI crude was trading around $92/bbl before then and within two weeks was trading at $124) coupled with market betas estimated in our Bayesian factor-model framework, we computed expected price movements.
- Energy. We correctly identified the direction of share price movement for 18 of 21 energy stocks listed in the S&P 500. For the energy sector, we estimated a positive return of 18% on a market-cap-weighted basis, compared to a 13% realized return.
- Utilities. We correctly identified the direction of share price movements for all 28 utilities stocks listed in the S&P 500. For the sector, we predicted a 4% return, compared to 11% realized. We made the right bet but underestimated the potential upside.
- Air Transportation. We correctly identified the direction of share price movements for all but one of the eight stocks classified as an airline or air freight listed in the S&P 500. Here we made the right directional bet (useful for hedging strategies) but could not accurately predict the size of the downside.
This is all in the context of heightened volatility as shown in the table below, due not only to fast-moving energy-price shocks, but also the impact to agricultural and metal commodities, as well as general uncertainty regarding the geopolitical instability.
Volatility Before and After Russia Sanctions for S&P 500 Sectors
Entelligent’s data platform is designed to help investors seeking to implement sustainability goals while also managing their risks and returns relative to financial benchmarks like the S&P 500. Through this process, Entelligent also seeks to evaluate how portfolio managers are maintaining their commitments to Net Zero carbon emission goals through decisions designed to capture companies seeking to reduce their carbon footprints.
Entelligent’s Smart Climate® E-Score® data feed is available through the Open:FactSet Marketplace.
This analysis was completed using data through March 9, 2022. This article is adapted from content originally posted on the Entelligent web site.
Dr. Elliot Cohen, VP Research at Entelligent, and Nana Yaa Asante-Darko, Sustainability Finance Research Analyst at Entelligent, also contributed to this article.
This blog post has been written by a third-party contributor and does not necessarily reflect the opinion of FactSet. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.