S&P Dow Jones Indices has launched a new family of equity indices for investors seeking alignment with climate-related risks and opportunities.
The indices provide immediate decarbonization of at least 30%.
The S&P Paris-Aligned & Climate Transition (PACT) Indices are designed with significantly reduced carbon footprints in accordance with the Paris climate agreement – a global framework to avoid dangerous climate change by limiting global warming to well below 2°C.
The index family consists of two suites that satisfy the climate objectives and minimum standards for the European Union’s Paris-Aligned Benchmarks (PAB) and Climate Transition Benchmarks (CTB).
The main difference between the PAB and CTB indices is that the former aim for greater decarbonization relative to its parent universe.
Index construction is based on the criteria of the EU’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.
Within each suite, S&P DJI has initially unveiled one index covering large and mid-cap equities within the eurozone – the S&P Eurozone LargeMidCap Paris- Aligned Climate Index and the S&P Eurozone LargeMidCap Climate Transition Index.
The firm plans to build out the suites with additional Paris-Aligned and Climate Transition indices based on the European, US, and global developed universes.
Reid Steadman, Global Head of ESG Indices at S&P Dow Jones Indices, commented, “There is a growing urgency in Europe and globally to identify solutions that address the negative consequences companies and institutions face due to climate change. The PACT Indices provide transparency with respect to these consequences and investment strategies that address climate change risks and opportunities.”
Methodology
The new indices are based on the parent S&P Eurozone LargeMidCap Index. Companies involved in controversial weapons and tobacco, embroiled in ESG controversies, or in violation of UN Global Compact principles are excluded. The PAB index also removes companies with significant revenue exposure to the exploration or processing of coal, oil, and natural gas.
The remaining constituents are weighted using an optimization process that aims to minimize the change in constituent weights relative to the parent universe while reducing the total carbon intensity of the CTB index by 30% and the PAB index by 50%. Both indices also strive for at least a 7% annual decarbonization moving forward.
Carbon emission analytics is provided by Trucost, part of S&P Global.
S&P DJI is not the only index provider to offer indices specifically aligned with the goals of the Paris Agreement. Solactive unveiled a similar suite in February, 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.