EDHEC: Can climate equity investors cope with oil price volatility?
By Shahyar Safaee, Deputy CEO and Head of Business Development, Scientific Portfolio – an EDHEC Venture
Oil price volatility is back. But how vulnerable are climate equity investors this time around? In 2022, after the onset of the war in Ukraine, Paris Aligned Benchmarks (PAB) markedly underperformed market cap-weighted indices. This was largely driven by short risk bias in the energy sector. Now, with record levels of implied volatility in the oil futures market, will climate equity strategies demonstrate greater resilience?
A new Scientific Portfolio market review, ‘Can Climate Equity Investors Cope with Oil Price Volatility?’ recommends that investors should stress test portfolios. Forward-looking factor-based out-of-sample simulations can help to indicate how portfolios could perform under extreme oil price scenarios, revealing hidden sensitivities that go beyond energy sector exposure.
Energy market disruption adds new fuel to the ongoing debate about what ‘climate alignment’ should look like in equity portfolios. Strategies that focus on real-economy decarbonisation, rather than a low-carbon portfolio, may be increasingly attractive in an environment where energy sector positioning has a large impact on relative performance.
Volatility and backwardation signal supply shocks
The Middle East conflict has upended oil markets. The crude oil (WTI) futures shifted into deep backwardation between February and April 2026. Near-term prices now exceed long-dated contracts, a classic sign of scarcity. The market expects disruptions to ease by 2027, with December 2026 contracts trading $20 below front-month prices.
This is not just about prices, however. Implied volatility has exploded: the 30-day annualised volatility index (OVX) hit 120% in early March (vs. ~40% pre-war), meaning traders now price in daily oil swings of ±7.5%: up from ±2.5%. For equity investors, the question is urgent: how exposed is my portfolio?
The parallels to 2022 are stark. When Russia invaded Ukraine, crude spiked to $120, and Paris-Aligned Benchmarks (PABs) underperformed by 4.6% due to their structural underweight to Energy. Today, climate investors are right to ask: will history repeat?
The hidden risks in investors’ portfolios
Oil shocks do not just hit energy stocks. Portfolios’ factor risk profiles can create indirect oil sensitivity. The catch? These relationships are unstable. A comparison of the 2022 oil shock (February to September) and today’s (February to April 2026) shows that only telecoms (besides energy) behaved consistently in both periods.
So how do investors stress-test for the next shock? Scientific Portfolio’s out-of-sample conditional simulations offer a solution. By replicating a portfolio’s factor exposures back to the 1970s, we estimate how it would have performed in past oil crises, without requiring historical portfolio data from those periods. For example, a healthcare ETF’s current factor exposures would have underperformed by -4.76% annualised in high-oil regimes but outperformed by +4.57% in low-oil regimes. The statistical significance is >99% for both scenarios. This matters because investors can now model oil shocks without manually picking historical periods or stressing factors in isolation.
Climate alignment does not mean staying away from energy
The 2022 lesson was clear: excluding energy hurt PABs. Today’s investors know however that climate alignment is not just about reporting a low-carbon footprint, It is about driving real-world decarbonisation. Here is why selective energy exposure makes sense:
- Not all energy stocks are equal. 21% of a US Energy ETF and 16% of a US Oil & Gas E&P ETF hold companies with ambitious decarbonisation targets. Blanket exclusions ignore these leaders.
- Engagement > Divestment. High-impact sectors like energy determine the pace of transition. Staying invested lets investors push for change, via stewardship or by rewarding the most aligned players.
- The ambition-credibility gap. Oil & Gas firms often tout bold emissions targets, but their capital expenditure (Capex) plans tell a different story. This gap is a target for investor action: focus engagement where intentions and actions diverge.
Conclusion
Oil volatility is back, and climate portfolios cannot afford to ignore it. Investors should stress-test their exposures, reconsider energy exclusions, and target the ambition-credibility gap, because real impact requires more than just a low-carbon label.
