Boutique index provider Solactive has launched a low carbon fixed income index in collaboration with South Pole Group, a specialist project manager helping firms reduce their carbon footprints. The collaboration is the second in as many months following February‘s launch between the two on a series of low carbon equity indices, which contained the first smart beta low carbon index.
The Solactive SPG Euro IG Low Carbon Bond Index tracks euro-denominated corporate bonds with investment grade status, and selects companies that are less dependent on fossil fuels relative to higher carbon-emitting peers.
The Solactive SPG Euro IG Low Carbon Bond Index provides exposure to the fixed income securities of euro-denominated, investment grade corporate bonds where the issuer is in the top half of its economic sector in terms of lowering carbon emissions relative to revenues.
Steffen Scheuble, CEO of Solactive, said in a statement: “Solactive will make a vital contribution to the integration of climate change and mitigation efforts in fixed income investments as it will be providing the first diversified investment grade universe of bonds dedicated to finance low carbon companies.“
The Solactive SPG Euro IG Low Carbon Bond Index is derived from the Solactive Euro IG Corporate Index, which includes fixed rate bonds with an amount outstanding of at least €500m and a remaining time to maturity of at least 2 years.
As an initial screening stage, all companies that do not report their carbon emissions are excluded from the selection pool. This process reflects the belief that non-reporting companies are likely to have higher carbon emissions and no carbon reduction strategies in place.
Companies are thereby separated into their respective economic sectors and ranked according to their carbon footprint scaled by revenues, determined by a proprietary methodology of South Pole Group. Companies whose relative carbon emissions fall below the median company within each sector are selected for inclusion in the index. Constituents are weighted according to their market value.
Following the Paris Climate Conference, where the ‘two degree target’ became the de facto global climate change policy, many of the world leading economies have already imposed taxes or partial taxes on carbon (e.g. US, China, UK, Sweden) or implemented regulatory standards to lower emissions (e.g. Emission Trading Scheme in the EU). France is the first country to have introduced a carbon reporting obligation on financial institutions.
Growing global concern about climate change has also encouraged the adaptation of climate themed investment strategies and prompted the inception of investor coalitions committed to reduce their portfolio exposure to greenhouse gas emissions. That being said, low carbon indices has thus far been limited to the equity side so far.
Given the large proportion of global assets dedicated to fixed income debt, bringing workable low carbon investment solutions into debt markets is a key factor in aligning the entire finance industry with global climate change policies.
Dr. Maximilian Horster, Partner at South Pole Group, commented: “Until recently, transferring the logic of low carbon investments from equity to fixed income has been a challenge. We are excited that our innovative methodologies and unmatched climate change data capabilities now enable easy and effective climate friendly fixed income investments.”