FTSE Russell has launched a suite of climate-themed equity indices aligned with the Paris Agreement’s goal of limiting global warming to two degrees above pre-industrial levels.

Aled Jones, Head of Sustainable Investment Product Management, EMEA, FTSE Russell.

The FTSE EU Climate Benchmarks Index Series presently consists of eight indices that are based on some of FTSE Russell’s best-known global, regional, and single-country benchmarks.

These include the FTSE All-World (global), the FTSE Developed and FTSE Developed ex-Australia (global developed), the Russell 1000 (US large-cap), the FTSE Developed Europe ex-UK (Europe ex-UK), the FTSE All Share (UK), the FTSE Australia 200 (Australian large-cap), and the FTSE Emerging (emerging markets).

Each index first excludes UN Global Compact violators, firms with operations in controversial weapons or tobacco, and companies deriving revenue above a certain threshold from operations linked to coal (+1%), oil (+10%), and natural gas (+50%).

The remaining constituents are then reweighted in order to satisfy the requirements of an EU Paris-aligned benchmark as laid out by the EU Technical Expert Group (TEG) Report on Climate Transition and Paris-aligned Benchmarks.

The TEG requirements include an average carbon emissions reduction of more than 50% compared to the parent index as well as an annual 7% carbon emissions reduction moving forward.

Alongside these core objectives, the indices also seek to satisfy several secondary objectives including reducing exposure to companies with significant fossil fuel reserves, increasing exposure to companies generating ‘green’ revenues from renewable energy projects, over or underweighting companies according to their management quality of climate issues, and ensuring diversity remains at the stock level.

Additionally, the weight of the banking sector will not be allowed to exceed its weight in the parent index. FTSE Russell is the first to incorporate this criterion into its climate indices which it says reflects the funding role that banking institutions play as a contributory factor to climate change.

Each index is classified under article 9 of the EU’s Sustainable Financial Disclosure Regulation (SFDR) indicating they are financial products with ‘sustainable investment’ as their core objective.

FTSE Russell also plans to launch a suite of equity indices aligned to the EU Climate Transition Benchmark (CTB) criteria later this year. CTB indices are similar to Paris-aligned indices although they incorporate a less ambitious carbon reduction target of 30%.

Aled Jones, Head of Sustainable Investment Product Management, EMEA, FTSE Russell, said: “Major asset owners are increasingly using climate benchmarks as an effective way to both quantify, and respond to, climate risks and opportunities. We are continuing to see rapid adoption of climate-themed indices and data sets, especially in the UK and continental Europe. These indices represent the tools investors need to reallocate equity and fixed income portfolios and ultimately achieve climate objectives.”

The initial FTSE EU Climate Benchmarks Index Series is as follows:

FTSE All-World Paris-aligned (PAB) Index
FTSE Developed Paris-aligned (PAB) Index
FTSE Developed ex Australia Paris-aligned (PAB) Index
Russell 1000 Paris-aligned (PAB) Index
FTSE Developed Europe ex UK Paris-aligned (PAB) Index
FTSE All-Share Paris-aligned (PAB) Index
FTSE Australia 200 Paris-aligned (PAB) Index
FTSE Emerging Paris-aligned (PAB) Index

FTSE Russell is relatively late in launching Paris-aligned climate indices with rival index providers S&P Dow Jones, MSCI, Solactive, and Euronext already offering suites in this category.

Paris-aligned strategies have proven popular with ETF product developers, with Lyxor, Amundi, Franklin Templeton, UBS, BlackRock, and BNP Paribas all having launched products in this space.