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Last week, State Street Corporation announced three new publicly available data sets that will show portfolio allocation trends among large institutional investors. Here’s more detail:

– The Institutional Investor Holdings Indicator tracks the aggregate holdings of institutional investors across three asset classes: stocks, bonds and cash. Shifts in asset allocations convey information about how investors view the economy and their outlook for markets. When investors are bullish on markets, they tend to hold more stocks; when they are bearish, they tend to hold more cash and bonds. The Holdings Indicator is calculated daily and will be released monthly.

– Institutional Investor Risk Appetite Indicator is based on flows—buying and selling activity—rather than portfolio positions. It reveals whether investors, in aggregate, are buying or selling risky assets. For example, selling less risky bond or stock investments to buy riskier ones would drive up this score. While the Holdings Indicator tells us about current positioning, the Risk Appetite Indicator tells us about the direction of travel. The Risk Appetite Indicator is calculated daily and will be released monthly.

– The State Street S&P Global Institutional Investor Carbon Indicator tracks the overall exposure of institutional investor portfolio holdings to carbon emissions. Leveraging aggregated and anonymized custody and accounting data from State Street, together carbon emissions data from S&P Global powered by S&P Global Sustainble1, the indicator will show how institutional investors are managing their exposure to carbon risk, and what is driving shifts in these exposures. The Carbon Indicator will be released annually.

The tracker for carbon emissions is useful for anyone attempting to understand & predict investor behaviors on that topic, because it is a data-based alternative to the various polls & surveys that float around from time to time. In fact, State Street has already used the data for a new report – which shows that from March 2022 – March 2023, investors’ emissions exposures increased, while intensity exposures fell.

I don’t know whether that outcome was something investors were intentionally striving for, but it shows how complex and nuanced asset allocation is during this time of the energy transition – versus just “woke” or “not woke.” Here are the highlights from the study (also see this ESG Today article):

• The carbon emission exposures of institutional portfolios rose in between March 2022 and March 2023, returning to levels higher than any seen since 2019: portfolio companies emitted more carbon overall with emissions exposure rising over 8% from 3.93 to 4.27 million metric tonnes year over year.

• The efficiency with which portfolios leverage carbon emissions to generate revenues, however, increased, with carbon intensity exposure falling over 10% from 152 to 137 tonnes emitted per $1 million of revenue. These contrasting moves represent, respectively a sharp reversal in the trend of declining exposures and a continuation of the trend in efficiency gains that we observed between March 2018 and March 2021. The low emissions exposures of 2020 and 2021 were driven in part by global declines in emissions due to COVID restrictions, and these have reversed as the economy has recovered.

• From March 2022 to March 2023, high-carbon sectors, such as Energy, outperformed the overall market as oil prices remained elevated. These companies performed well even as the regulatory price of emissions rose in Europe.1 As a result of these higher valuations, Energy holdings represented a larger share of many institutional portfolios; this repricing was the main driver of increased weighted-average carbon emissions exposure at the portfolio level, while the general post-COVID renewal of economic activity accompanied increased emissions by Energy, Materials, and Utilities firms. The decrease in intensity exposure was driven by Energy and Materials companies – in this case by their reductions in company carbon intensity as firms grew revenues faster than emissions.

• Despite the fact that carbon-intensive sectors like Energy outperformed the market in 2022, many sophisticated decarbonization strategies also outperformed. This seeming paradox is due to the fact that sophisticated decarbonization strategies hold sector weights neutral and tilt toward more carbon efficient firms within each sector. For example, they might hold overall exposure to the Energy sector constant, but tilt toward more efficient emitters within that sector. As a result, they can benefit when energy prices rise since they are tilted toward companies that use energy more efficiently.

– Liz Dunshee