By Devin Weiss

A changing climate will undoubtedly continue to impact the global economy through supply chain disruptions, infrastructure damage, and energy shortages. To curb these effects, global companies and investors continue to usher in new net zero climate commitments. Funding such a transition will require consistent and committed capital over a longer time horizon. However, according to new data from the upcoming edition of FCLTCompass, the investment time horizons for equity investors got shorter in 2020.¹

This raises two critical questions: what is the cause of this shift, and what impacts will this shift have on climate change mitigation and adaptation efforts?

Between 2019 and 2020, global investors’ average holding period decreased by 13.6% and 12.8% for active and indexed equities, respectively. Though largely a result of the volatility brought on by the pandemic, this contraction could also be a precursor to better climate investment strategies to come. A Top-Down Approach to Net Zero Portfolios outlines both shorter- and longer-term routes to construct net-zero investment portfolios, all of which require portfolio turnover that would explain lower holding periods in the near term.

Equity Holding Periods, 2009-2020

While divestment and excluding carbon-intense assets from portfolios can put investors on the track to net zero, these strategies have limited impact on decarbonizing the real economy. Longer-term top-down portfolio construction techniques, like analytical or catalyst-based approaches, emphasize a focus on innovation and engagement in an attempt to seize the opportunities that a net zero transition can bring. Regardless of which path investors take, the resulting reallocations can appear short-term despite the inherently longer-term climate objectives underpinning them. Put in a different way, investors may be retooling their portfolios in the near term to better position themselves to take advantage of longer-term climate-driven risk and return opportunities.

In a turbulent year like 2020, there are alternative explanations for the decrease in equity investment time horizons. An increase in volatility could be pushing shorter-term investors out of the market, as margin calls stopped out their positions and caused selling pressure. It may also be that more investors used indexed products as placeholders until they decided where to allocate their capital for the longer-term – contributing to churn in the underlying index constituents.

But recent trends among both companies and institutional investors support the theory that net zero commitments may be a contributing cause to shorter holding periods. Approximately one quarter of S&P 500 companies have made net-zero commitments to improve their environmental impact. Additionally, 160 firms representing over $130 trillion in assets have backed Mark Carney’s Glasgow Financial Alliance for Net Zero (GFANZ), sending a clear signal that the connection between unabated climate change and losses in long-term financial returns can no longer be ignored.

Despite the need for a long-term outlook in order to achieve net zero goals, the high turnover and lower equity holding periods seen in 2020 could indeed be evidence of investors positioning themselves to seize the opportunity of the global net zero transition.

For more on this and other changes in capital allocation trends, join our December 9 webinar, The Economics of Resilience: Capital Allocation and Investment Horizons During COVID-19, following the December 6 release of FCLTCompass 2021.

^{[1] These countries in the FCLTCompass 2021 report will include the United States; United Kingdom; Canada; Netherlands; China; Germany; South Korea; Singapore; Brazil; Italy; France, and India.}