Lyxor Asset Management has published the temperature increases currently implied by more than 150 of its ETFs in order to help investors better assess the impact of their portfolios on climate change.
Florent Deixonne, Head of SRI at Lyxor Asset Management.
The disclosure, a first for the ETF industry, builds on several initiatives introduced by Lyxor in recent years that are aimed at redirecting capital towards investments promoting a low-carbon world.
In 2017, the firm introduced the world’s first green bond ETF. In 2019, it instituted an official climate policy. And in 2020, it launched an ecosystem of climate ETFs aligned with the goals of the Paris Agreement.
The Paris Agreement sets out a global framework to avoid dangerous climate change by limiting global warming to below 2°C during this century and pursuing efforts to limit it to under 1.5°C.
While several ETF providers in Europe have also introduced ETFs aligned with the Paris Agreement, including Amundi, Deka, Franklin Templeton, most recently Tabula (it unveiled the world’s first Paris-aligned corporate bond ETF), Lyxor is the first to show how its regular ETFs measure up against the global accord.
Florent Deixonne, Head of SRI at Lyxor Asset Management, commented: “All portfolios, indices, and benchmarks have some form of climate impact. Today, we are beginning the process of helping all kinds of investors assess those impacts and manage those risks by publishing temperatures.
“There’s little doubt that ensuring investments are truly sustainable becomes a fundamental fiduciary duty for professional investors, whether they are advising institutions or investing on behalf of individuals. Individuals who manage their own money will also be able to use this information to make more climate-aware investment decisions.”
Lyxor has disclosed the temperature impact on the majority of its equity ETFs, which cover a wide range of traditional beta exposures, including single-country, regional, and sectoral funds, as well as factor-based, thematic, and broad ESG strategies.
The temperature scores are derived from a model that maps the expected trajectory of the total carbon emissions of all companies within an ETF and compares it to that fund’s carbon budget for an implied trajectory and temperature goal.
The model utilizes both past emissions data and future emission projections for companies within an ETF, based either on commitments announced by the companies themselves or on estimates provided by S&P Trucost, a climate data specialist and a subsidiary of global index provider Standard & Poor’s.
The approach combines two methodologies: Sectoral Decarbonisation Approach (SDA), developed by the Science Based Targets Initiative, which is applied to companies in sectors with high greenhouse gas emissions (electricity production, steel production, aviation, etc.), and the Greenhouse Gas Emissions per unit of Value Added (GEVA) approach for companies in other sectors.
The most climate-friendly ETFs (those with carbon emission trajectories well below the model’s implied trajectory) have been grouped together and assigned temperature scores of <1.5°C, indicating their alignment with the Paris Agreement’s most ambitious goal of limiting global warming to below 1.5 degrees. There are currently just 21 ETFs within this category, while a further 17 funds have implied temperature impacts between 1.5°C and 2°C. These funds naturally include Lyxor’s Paris-aligned suite as well as DAX, Nasdaq 100, and certain sector funds including those targeting financials, utilities, and healthcare.
The worst climate offenders (those with carbon emission trajectories well above the model’s implied trajectory) are also grouped together with temperature scores of >3°C. A total of 91 ETFs fall within this category including many traditionally core exposures such as Lyxor’s S&P 500, FTSE 100, CAC 40, Euro Stoxx 50, and MSCI Emerging Markets products.
The model also produces some surprising results with certain ESG-focused ETFs, such as Lyxor’s global and US ‘ESG Trend Leaders’ funds, as well as the firm’s global ‘Gender Equality’ ETF, falling amongst the worst climate offenders. Additionally, the Lyxor DAX UCITS ETF is ranked amongst the most climate-friendly, while its ESG counterpart, the Lyxor DAX 50 ESG UCITS ETF, ranks amongst the worst climate offenders.
Lyxor notes that temperature results communicated on its funds should only be used as a support for evaluation and portfolio steering and should not be the driver of investment decisions. Like every approach to measure a fund’s climate impact, Lyxor’s model has limitations.
The main drawbacks include potential input errors (misestimating the future carbon emissions of companies), the failure to include scope 3 emissions in the model, and assumptions used in the GEVA approach – GEVA applies an emissions reduction rate to all sectors with no consideration of each sector’s specific energy transition challenges.
Lyxor has only disclosed temperatures for ETFs whereby S&P Trucost can provide carbon emissions data for companies representing at least 80% of fund assets. The firm has also disclosed the coverage rate of all ETFs with disclosed temperatures. Lyxor expects to disclose temperatures on more funds as companies are included in S&P Trucost’s database and as the model improves and evolves.