Solactive has further developed its family of climate transition indices with the introduction of fixed income benchmarks that incorporate low carbon considerations.

Each index aims to reduce its total carbon intensity by at least 7% per annum.

The fixed income indices fit within the firm’s two existing climate transition index series – the Solactive ISS ESG Provisional Climate Transition Benchmark Indices (CTB) and the Solactive ISS ESG Provisional Paris-Aligned Benchmark Indices (PAB).

These series were unveiled in February 2020, measuring the performance of equity markets that are aligned with the Paris climate agreement – a global framework to avoid dangerous climate change by limiting global warming to well below 2°C.

Index construction is based on the criteria of the European Union’s Technical Expert Group on Sustainable Finance (TEG).

The TEG sets out standards for companies reporting ESG-related disclosures as well as for the construction of climate benchmarks. Its framework aims to reduce the risk of greenwashing – the process of conveying a false impression about how a company’s products are more environmentally sound.

The main difference between the CTB and PAB series is that the PAB take a more severe approach by targeting a significantly lower carbon intensity.

The new fixed income indices harness the same methodologies underlying the CTB and PAB series but focus on fixed-rate bonds issued by corporate entities.

According to Solactive, the indices within each series may serve as the underlying for passive investment products, such as ETFs, or as performance benchmarks for emission-related strategies.

Timo Pfeiffer, Chief Markets Officer at Solactive, commented, “Given the relevance of these new benchmarks and our flexible architecture, it was evident to us that we wanted to service clients on the equity and fixed income side. The fact that we can help our clients on both ends of the spectrum with a consistent framework highlights Solactive’s long-standing tradition to go the extra mile for our partners.”

Methodologies

Solactive has initially released one fixed income index for each of the climate transition series, although the frameworks may be applied to other bond universes dependent on clients’ choice.

The Solactive ISS ESG Euro Corporate IG Provisional Climate Transition Benchmark Index and the Solactive ISS ESG Euro Corporate IG Provisional Paris-Aligned Benchmark Index are both based upon the Solactive Euro IG Corporate Index universe which comprises euro-denominated, investment-grade corporate bonds with at least €500 million outstanding and more than one year remaining to maturity.

Each series harnesses data from ISS ESG, the responsible-investment arm of Institutional Shareholder Services (ISS), to remove firms operating in non-ESG-friendly industries and then reweights remaining constituents in favour of those with lower carbon emissions. Notably, ISS ESG aims at taking companies’ entire production chain into account when analyzing carbon emissions.

The CTB index excludes issuers with operations in controversial weapons as well as firms that are proven violators of international norms related to the environment, human rights, corruption, and labour rights.

The remaining constituents are reweighted so as to reduce the total carbon intensity of the index by 30% relative to the parent universe while adhering to certain constraints for turnover and key risk metrics such as credit, duration, sector, and issuer risk relative to the parent universe.

The PAB index takes a similar approach by initially utilizing the same exclusion criteria, while also removing firms with excessive revenue derived from the following industries: coal mining and power generation (1% revenue threshold), fossil fuel production, exploration, distribution, and services (10%), and electric power generation from fossil fuel sources (50%).

The constituents that remain are reweighted so as to reduce the total carbon intensity of the index by 50% relative to the parent universe while adhering to the same constraints as above.

Furthermore, at each semi-annual rebalance, both index series incorporate ongoing decarbonization by targeting a further reduction in their total carbon intensity of at least 7% per annum.

Several index providers have launched benchmarks that are aligned with the goals of the Paris Agreement. S&P Dow Jones Indices recently unveiled its suite, while MSCI also has a comparable offering which has been licensed to Lyxor to underlie a suite of four ETFs covering global developed, US, European, and emerging market equities.

Solactive is, however, the first amongst its rivals to move the series into fixed income territory.