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Morningstar Indexes has introduced a new series of indices that are designed to help investors progress towards meeting EU Climate Transition Benchmark (CTB) and Paris-Aligned Benchmark (PAB) requirements.
Morningstar has introduced a suite of PAB-compliant equity indices.
The Morningstar EU Climate Indexes aim to enable investors to target companies within a broad market index that are on track for decarbonization in line with Paris accord targets.
The indices aim to achieve this objective while minimizing tracking error against a regular parent index, thus making them representative of core portfolio exposures.
The series combines Morningstar core benchmarks with carbon emissions data and carbon risk ratings from Sustainalytics, a provider of ESG research, ratings and data. Sustainalytics is owned by Morningstar.
The indices have been constructed to take into account assessments of transition risk while also emphasizing carbon solutions.
The methodology tackles transition risk by underweighting high carbon emitters based on Scope 1, 2, and 3 emissions data as well as companies that are deemed to be high risk. Conversely, the methodology tilts constituent weights towards companies that are setting and meeting credible emissions reduction targets. This includes companies that are operating within high-risk climate risk sectors but which are making genuine efforts to reduce emissions.
To emphasize companies with carbon solutions, the methodology increases the weight of companies operating in renewable energy, green transportation, green real estate, and energy efficiency.
Finally, the methodology seeks to align the indices with a 1.5 degree scenario by applying a climate transition matrix that utilizes forward-looking data to bake in year-on-year self-decarbonisation of at least 7%.
The series has been initiated with the Morningstar Global Markets Paris Aligned Benchmark (PAB) Index and the Morningstar Global Markets EU Climate Transition Benchmark (CTB) Index. Both indices are designed to represent 90% of the market capitalization of eligible developed and emerging equity markets globally. The former targets a 50% minimum reduction in average emissions versus its parent benchmark, the Morningstar Global Markets Large-Mid Index, while the latter targets a 30% reduction in emissions versus the same parent benchmark.
Commenting on the launch, Tobias Sproehnle, head of Morningstar Indexes in Europe, said: “Global investors are more focused than ever on climate change and asking for more advanced measures to track progress in meeting their commitment to carbon neutrality.
“Our new EU Climate Indexes, which harness the power of Morningstar through our Indexes and Sustainalytics teams, combined with focused ESG education and insights via Morningstar’s EU Sustainable Finance Action Plan Resources help clients address the complexity of climate policy in order to meet regulatory requirements and create more focused investment strategies.”
This new index suite adds to Morningstar’s growing investment in indices and data.
In September, Morningstar announced the acquisition of Moorgate Benchmarks, a provider of index design, calculation and administration services. Sproehnle was previously CEO of Moorgate.