We aim to provide transparency around the S&P PACT Indices (S&P Paris-Aligned & Climate Transition Indices), a sophisticated index solution to align with a 1.5°C trajectory (EU PAB and CTB Aligned) and mitigate a multifaceted range of potential financial risks, while assessing opportunities companies may face from climate change, as laid out by the Task Force on Climate-related Financial Disclosures (TCFD).
- The S&P PACT Index weights, relative to the benchmark index, are attributable to an exclusion effect (whether a stock is eligible for the index) or reweighting effect (how a stock performs from a climate perspective), as seen in Exhibit 1.
- The exclusion effect accounts for 30%-40% of active weights for the S&P Climate Transition (CT) Indices, while for the more ambitious S&P Paris-Aligned Climate (PA) Indices, exclusions account for 40%-60% of deviations from benchmark weights. The reweighting effect explains the remaining active share.
- The reweighting effect is driven by climate and index construction factors, which is affected by the strength of constraint, climate datasets distributions, and climate factor correlations.
- A company’s transition pathway, environmental score (as measured by the S&P DJI Environmental Score), physical risk, and high climate impact revenues are all key drivers of weighting S&P PACT Index constituents.
- The high-quality climate factor diversification helps better understand transition risk, physical risk, and opportunities due to low correlations.
- Eligible companies can be allocated a higher weight in the S&P PACT Indices by significantly reducing their carbon intensity year-on-year, disclosing more information regarding environmental policies and metrics, improving performance against environmental policies and metrics, divesting assets in locations highly exposed to physical risks, and reducing assets’ physical risk sensitivity factors.