Solactive launches first smart beta low carbon equity indices

Feb 8th, 2016 | By | Category: ETF and Index News

Niche index provider Solactive, has unveiled a range of climate-themed investment strategies with the launch of the Solactive SPG Low Carbon Index Family, which includes a first of its kind smart beta tranche. The six indices have been created in collaboration with South Pole Group, a specialist in helping companies reduce greenhouse gas emissions, and utilise a screening process to exclude companies with relatively unfavourable carbon emission records.

Solactive launches suite of traditional and smart beta low carbon equity indices

Steffen Scheuble, CEO of Solactive.

The indices have been produced with European-, eurozone-, or US-focused exposure. Each index is supplemented with an alternatively-weighted version, which assigns a greater importance to firms with higher dividends and lower volatility. Using back-tested data from February 2006, the smart beta versions have provided superior risk and return metrics across all three indices.

Steffen Scheuble, CEO, Solactive AG, said: “We are proud to be the first real provider in the market that can offer investors access to a smart beta low carbon strategy. Such an investment shows outstanding performance and volatility figures, while at the same time, ensures an environmental friendly approach.”

Investors are increasingly including socially-responsible investment frameworks in their portfolio allocations to decrease their long-term risk exposures. Carbon intensive industries such as oil and gas exploration not only contain significant event risk (as evidenced through the deepwater horizon oil disaster which saw BP’s share price plummet by 52% between 20 April and 9 June 2010) but are increasingly at risk of newly imposed regulations negatively affecting profit margins, such as through carbon charges.

Many investors also wish to shift their portfolios away from companies who are polluting the environment and contributing to the risk of climate change for ethical reasons. The COP21 climate conference in Paris is indicative of a growing awareness at the global level that reductions in emissions are now a necessity. Carbon-free indices represent not only the possibility of avoiding participating in climate change but also, as support grows, constitutes a means of promoting social change.

Dr. Maximilian Horster, Director Financial Industry, South Pole Group, explains that global warming is a big challenge, but also a great opportunity. “Investors now have the chance to take action on climate, mitigate risks and capitalise on the opportunities created by smart companies who pursue low-carbon investment strategies.”

The methodology behind these indices works by analysing potential constituents on a sector-by-sector basis to avoid over-concentration. Within each sector, the highest quarter of firms with comparatively high greenhouse gas emissions are excluded. Furthermore, a quarter of firms with poor or absent climate risk mitigation or adaptation strategies are also omitted. As such the final index will include the top performing 50% of firms with superior carbon emission records or mitigation strategies within each sector.

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