As the world continues to focus on sustainability and the energy transition, it is understandable that market participants are seeking to incorporate sustainability considerations into their commodities portfolios. To that end, S&P Dow Jones Indices (S&P DJI), utilizing a new environmental dataset developed in collaboration with S&P Global Sustainable1 (Sustainable1), has launched the S&P GSCI Climate Aware, which seeks to retain the inflation sensitivity and diversification benefits of the broad commodities market, but with a lighter environmental footprint than the benchmark S&P GSCI.
- What drove the creation of this index? Sustainability considerations have become a major focus area for many market participants. Some asset classes such as equities and fixed income have led the way, with granular information already available to incorporate them into an investment strategy. Commodities, which play a key role in current environmental impacts and in the energy transition to come, have paradoxically lagged this evolution.
In this context, market participants have expressed a desire for a broad, rules-based commodity index that incorporates sustainability considerations. The S&P GSCI Climate Aware addresses the need for an index that incorporates environmental considerations while maintaining the key attributes of the S&P GSCI, namely diversification and inflation protection.
- What is the S&P Global Commodity Environmental dataset? Recognizing the need for increased transparency on environmental issues across commodity value chains, S&P DJI and Sustainable1 have developed the S&P Global Commodity Environmental dataset, which covers a range of agricultural, energy, precious metal and industrial metal commodities (including all of the S&P GSCI constituents). The dataset provides physical and financial impact data on GHG emissions, water consumption and land use at the commodity-level based on life cycle impact assessment (LCIA) factors, and natural capital valuation metrics. It can help investors understand the environmental risks and opportunities associated with their investment in specific commodities, as well as across portfolios, indices and benchmarks.
More information on the dataset can be found here.
- What are natural capital valuation metrics? The natural capital valuation metrics presented in the dataset represent the costs to society and the environment caused by each impact. These are the indirect costs of production that are not borne by polluters, but often incurred by other businesses and society at large through factors such as health impacts, property damage and lost amenities. The valuation metrics for greenhouse gas (GHG) emissions are based on global averages, due to the way they affect the environment and society.
Sustainable1 values GHG emissions using an estimate of the social cost of carbon (SCC). The SCC represents an estimate of the marginal externality cost of GHG emissions, as it reflects the global cost of the damages caused by GHG emissions over their lifetime in the atmosphere. The impact of water consumption is valued based on the consequences of the restricted access to water on human health and the environment. The land use valuation methodology considers the ecosystem services lost when naturally occurring ecosystems are converted to artificial ecosystems or gained when natural ecosystems are restored or conserved.
- What are environmental CVIs? The commodity valuation intensity (CVI) metric ascribes an economic value to each environmental impact on a unit of commodity production or per dollar invested (or dollar per contract value). This allows for comparison across commodities and across environmental impacts. Examples of CVI metrics are provided in the Exhibit 1.