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As exchange-traded fund assets tracking environmental, social and governance (ESG) exposures continue to grow, S&P Dow Jones Indices (S&P DJI), one of the world’s leading index providers, has announced the launch of three new climate change indices.
The new range of indices from S&P DJI offers reduced exposure to companies with high carbon footprints.
The popularity of investing from a sustainable and ethically responsible standpoint is on the rise for two important reasons: First, the long-term economic risk associated with companies in carbon intensive industries, such as oil and gas, constitutes a significant investment concern. The cost of environmental disasters (such as the deepwater horizon oil spill) and increasing regulations curbing carbon emissions or charging companies that emit them, for example, may put pressure on the earnings of these companies. Second, many investors do not want their portfolios to support companies who are polluting the environment and contributing to the risk of climate change.
In response, S&P DJI have created the S&P Global 1200 Carbon Efficient Index Series, the S&P Global 1200 Carbon Efficient Select Index Series and the S&P Global 1200 Fossil Fuel Free Index Series which allow investors to track equities by three varying ESG narratives.
“Climate change and its impact present a challenge from an investment perspective,” said Julia Kochetygova, Head of Sustainability Indices at S&P Dow Jones Indices. “Many investors are trying to facilitate the transition to a low-carbon economy by financing projects in the renewable energy sector, avoiding high-carbon producing companies or minimising their exposure to fossil fuel companies. The three new S&P DJI indices are designed to provide alternative performance narratives to standard benchmarks, being comprised of those companies meeting the strict fossil fuel and carbon efficient standards set within each index series.”
The S&P Global 1200 Carbon Efficient Index Series is designed to track the performance of the S&P Global 1200, the parent index, as closely as possible while de-emphasising those companies with high levels of carbon emissions by assigning them a lower weight than the parent index, conversely, companies with low levels of carbon emissions will be overweighted.
The S&P Global 1200 Carbon Efficient Select Index Series takes this strategy a step further by ruling out companies with the largest relative carbon footprints altogether from the indices.
The Carbon Footprint for both of the Carbon Efficient and Select Index Series is defined as the company’s annual greenhouse gas emissions and is calculated by Trucost Plc.
“Taking account of companies’ operational and often more significant supply chain’s carbon exposure ensures a robust approach to risk reduction,” said Neil McIndoe, Head of Environmental Finance at Trucost Plc.
The S&P Global 1200 Fossil Fuel Free Index Series is also based on the S&P Global 1200 index series and is designed to represent a portfolio of companies which is completely disinvested from those which own fossil fuel reserves. The exclusion rules are based on any use of fossil fuels, including third party and in-house power generation. RobecoSAM conducted the research for ownership of fossil fuel reserves.
“Climate change is a large and complex issue, and it is inextricably linked to many other sustainability challenges,” said Guido Giese, Head of Indices at RobecoSAM. “Many investors understand that exposure to fossil fuels might create a new type of valuation risk in their portfolios. The S&P Global 1200 Fossil Fuel Free Index Series was developed for investors who want to address exactly this new risk.”