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Top S&P market indexes more carbon-heavy in 2017, report shows

A review of 12 S&P Global stock market indexes suggests that while global financial market participants overall are making progress toward curbing emissions, the weighted-average carbon intensity profiles of the companies on most of the benchmarks increased in 2017.

The report also found that a number of lower-carbon focused version indexes of the S&P 500 and S&P Global 1200 outperformed the two benchmarks over a five-year period in most cases. For example, the S&P Global 1200 Fossil Free Carbon Efficient Index posted a 12.93% annualized return over five years through 2017 compared to the 11.55% annualized returns of the S&P Global 1200 index.

Investors often use broad indexes as benchmarks to measure how well markets are performing. Along those same lines, the 2018 Carbon Scorecard issued by S&P Dow Jones Indices on May 23 claimed it offers some insight into how quickly the market, measured by the largest companies in each international region, is transitioning to a lower-carbon economy and the risks and opportunities for investors as they make their index-based investment decisions.

"How companies can adapt their products and services to changing consumer demands and how they are exposed to regulations that seek to put a price on carbon are among the key questions to which shareholders, lenders, and insurers now seek answers," the report said.

All but two of the 12 indexes increased their share of renewable generation and cut back on fossil fuel power, said the scorecard, which this year featured some new analysis by Trucost. Moreover, six of the 12 indexes saw absolute emissions decrease in 2017 over the prior year. Tt the same time, the weighted average carbon intensity of nine indexes climbed, meaning the indexes may still face some exposure to climate-related risks.

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To determine each index's carbon intensity, the report's authors divided the emissions of each company in the index by that company's revenues, multiplied by the investment weight that company has in the index. The weighted carbon intensities of the companies were then added together.

The report comes months after the International Energy Agency in March found that global energy-related carbon dioxide emissions climbed 1.4% in 2017 even as U.S. levels declined for the third year in a row.

The index scorecard also looked at potential future emissions from companies' existing fossil fuel reserves, companies' exposure to coal revenue losses from coal extraction or coal-fired generation, and where companies are in the transition to using more clean energy measured against how much change will be needed to achieve the goals of the Paris Agreement on climate change. The IEA has estimated that more than $100 trillion in infrastructure investment will be needed over the next 15 years to limit global warming to 2 degrees C from pre-industrial levels.

For the first time, the carbon footprint report also measured the expected exposure a company could face if carbon pricing were implemented around the world under the Paris Agreement by 2030. But the report also said each of the metrics has different implications. "Low exposure in one aspect of carbon risk does not necessarily imply a low exposure in another," the report said.

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One index bucked the upward carbon intensity trend. The S&P Asia 50 index of companies in Hong Kong, Singapore and Taiwan, which had the most carbon-intensive benchmark in 2016, showed the greatest year-over-year improvement with an overall reduction of 26% in its weighted average carbon intensity in 2017. Most of the decline came from emissions reductions by companies such as Formosa Plastics Corp. and the removal of Korea Electric Power Corp. from the index. The utility's emissions made up 41% of the benchmark's total in 2016.

Indexes that had higher concentrations of utilities tended to have higher weighted average carbon intensities. That proved particularly true for the S&P/TSX 60 index of Canadian companies. The S&P/TSX 60 was the most carbon-intensive index in 2017 and the only equity benchmark reviewed in the report that increased its weight in utilities over the prior year.

The report also showed that more companies are paying attention to the demands of investors to have quantitative data on the emissions of companies in their portfolio. Of the companies in the S&P Global 1200 index, 81% report emissions data.

"Standardized, robust disclosure is crucial to the effective management of climate risks and, as such, it is encouraging to see that companies are responding to investor calls for greater transparency," the report said.

The report looked at the following indexes: S&P 500; S&P United Kingdom; S&P Europe 350; S&P Global 1200; S&P/TOPIX 150 index of Japanese stocks; S&P Eurozone Investment Grade Corporate Bond Index; S&P/ASX All Australian 50; S&P 500 Bond Index; S&P Latin America 40 index of major companies in Mexico, Brazil, Columbia, Chile and Peru; S&P/IFCI index of emerging global market companies; S&P Asia 50; and the S&P/TSX 60 of Canadian companies.

Trucost is a part of S&P Dow Jones Indices. S&P Dow Jones Indices and S&P Global Market Intelligence are owned by S&P Global Inc.