Imagine an index fund focused on climate change.
That was our goal in building our climate friendly stock portfolio. It tracks the total stock market like an index fund, but replaces high-carbon companies with those building solutions to climate change.
So how did it perform?
The purpose of this page is to walk through the math. We walk through how we simulated the historical performance of Carbon Collective’s stock portfolio. We also look at some other useful financial statistics.
We compare the results to the performance of the market using the S&P 500 (which represents the largest US companies) and the Russell 3,000 (which represents the US total stock market).
You can read more about our methodology for building this low-carbon stock portfolio and checkout a full breakdown of our portfolios allocations.
Carbon Collective’s climate friendly stock portfolio hasn’t existed until now. The only way for us to measure its financial performance was to run a simulation. So, we asked ourselves, “what if we had launched our investment strategy, not today, but at the beginning of 2015?”
Before going further, here’s a quick overview of how we build our stock portfolios:
The stock market is constructed of 11 sectors (technology, utilities, real estate, etc.) At a high level, our portfolios directly invest in index funds that track the seven low-carbon sectors of the stock market (~80% of the market in 2020). They give the allocation that was going to the high carbon sectors (~20%) to our collection of companies building climate solutions.
Now back to the simulation. Things get a little technical from here on out.
We begin the simulation with data pulled from 12/31/14 and updated the sector allocations annually on the last day of each year through 12/31/19. This better simulates how this strategy would have actually performed by incorporating the historical market capitalization of each sector and rebalancing the portfolio’s stock allocations annually based upon it. For example, on 12/31/14, the stocks representing the energy sector made up 8.45% of the total value of the stock market. By 12/31/19, where we simulated the last annual rebalance, energy stocks represented only 4.35% of the total stock market.
Things got a little more complicated for the individual stocks. Unlike the seven low-carbon sectors, which we represent with individual sector ETFs, the remaining four sectors are populated with stocks from the individual companies building climate solutions. Here’s an example of how we calculated the allocations for an individual stock in our Drawdown Index:
Question – Why didn’t we simulate further back to say, 10 years?
Answer – Too few of the companies in our Drawdown Index had yet entered the stock market 10 years ago, so we found simulating further back deviated too far from our strategy.
Further notes (if you want to double check our math):
Overall, while this exercise represents our best attempt at honestly simulating “what would have happened” if we had launched this strategy on 12/31/14, it is far from comprehensive. We sought to err on the conservative side, only rebalancing the portfolios annually with the new market sector weightings. In reality, our portfolios rebalance more often than that, using a trigger to buy or sell holdings in a given sector should it grow or shrink by more than 25% of its initial weightings within the year. Such rebalancing tends to perform better over time (at least historically). Historical results are no guarantee of future returns.
Most investment modeling software includes indexes for benchmarking. In our case, we use Kwanti which uses the S&P 500 Index TR (TR stands for “Total Return,” meaning dividends are included in the return figures and assumed to be reinvested) and the Russell 3000 Index TR. These indices track the largest companies on the New York Stock Exchange and the total stock market itself, respectively.
We pulled results from the simulation from a five year period spanning: 07/15/15 – 07/15/20.
Please remember that historical performance is no guarantee of future returns.
If you would like some further reading into the high level allocations, comparison of risk and returns, and a breakdown of each holdings performance, checkout the full PDF below: