Talking Points: Adding ESG Transparency to Real Estate

Indexology Magazine: Spring 2021

Climate Scenario Alignment, Net-Zero, and Uncertainty

Reducing Carbon Exposure in Australian Equities

TalkingPoints: Setting a New Low-Carbon Standard with the S&P/NZX Carbon Efficient Indices

Talking Points: Adding ESG Transparency to Real Estate

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Michael Orzano

Senior Director, Global Equity Indices

Adding ESG Transparency to Real Estate

More and more investors are integrating ESG risks into their investment process. Given the large size and specialized nature of real estate assets, the investment community has demanded sophisticated tools to more accurately identify real estate companies that own more sustainable properties and integrate this information seamlessly into their investment process.

S&P Dow Jones Indices has collaborated with GRESB, a leader in evaluating ESG characteristics of real estate companies, to create the Dow Jones Green Real Estate Indices. The indices, which utilize data from GRESB, are designed to be representative of the investment characteristics of conventional real estate benchmarks, but with an improved sustainability profile.

Index Offering

1. Why do real estate companies require a specialized approach to quantifying sustainability?

Dan: While sustainability considerations affect all industries, they are particularly relevant for the real estate sector. With an estimated 40% of all global carbon emissions being driven by the construction and operation of buildings, real estate is a particular industry of focus among institutional investors. Buildings are long-lived and typically cannot be moved to another place, which leaves them exposed to the direct localized consequences posed by sustainability risks: more stringent regulatory requirements; changing societal preferences for places to work, live, and play; and exposure to climate-related events such as flooding, water scarcity, and extreme weather conditions.

There's a growing recognition by companies and investors that ESG matters are fundamental to business performance and should be disclosed in financial reports. Businesses are also coming to realize that integrating ESG concerns into core business and financial decisions will generate new streams of data that can be used to enhance growth and sustainability.

Real estate is a complex business with varying degrees of control on construction quality and operational excellence. The GRESB framework is specifically tailored to real estate companies that seek to embrace industry best practices on the full range of ESG issues that can be material to shareholders.

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Indexology Magazine: Spring 2021

How can indices seek to align with a scenario in which global warming increases by no more than 1.5°C? What does it take to track the most innovative up-and-coming companies? Read the latest issue for the answers to these questions and more.

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Climate Scenario Alignment, Net-Zero, and Uncertainty

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Ben Leale-Green

Associate Director, Research & Design, ESG Indices


  • Net-zero commitments are starting to receive signatories, with USD 5.7 trillion and USD 37 trillion assets signed up to the Net Zero Asset Owners Alliance and Net Zero Asset Managers initiative, respectively.
  • Even optimistic targets show the world falling short of a 1.5°C scenario (see Exhibit 1). Scientific consensus suggests a 1.5°C pathway would require net-zero emissions by 2050, while 2°C pathways are closer to 2070-2080.
  • Absolute greenhouse gas (GHG) reduction (tracking a specified scenario) is aligned with meeting these goals, while relative GHG reduction (reduction to an underlying index) is better but not necessarily aligned.
  • The S&P PACT™ Indices (S&P Paris-Aligned & Climate Transition Indices) are designed to give investors confidence in following absolute decarbonization pathways.

Exhibit 1: Decarbonization Predictions


Both the Net Zero Asset Owners Alliance and Net Zero Asset Managers initiative have signed up to target net-zero GHG emissions by 2050 or sooner, binding trillions of dollars to be decarbonized. This raises the question, how can we grasp these climate targets and practically implement them?

Understanding scenario alignment as reductions in GHG emissions (or GHG intensity adjusted for inflation) at the portfolio level, aligned with that required of the global economy, allows the application of conclusions from climate scenario trajectories to broad-market indices. The EU Technical Expert Group on Sustainable Finance (TEG) promotes this philosophy as not simply limited to indices, but applicable to asset owners, asset managers, private investors, etc. as a method to decarbonize a portfolio.

We use data from the Integrated Assessment Modeling Consortium's (IAMC's) 1.5°C Scenario Explorer, used in the Intergovernmental Panel on Climate Change's (IPCC's) Special Report on Global Warming of 1.5°C, which is a collection of quantitative climate scenario pathways. These enable us to approximate scientific consensus on future climate scenarios. The next sections will discuss relationships among these climate scenario predictions.

Modeling future climate scenarios is tough, even for the world's brightest minds, due to the climatic system being complex in nature. This brings significant potential for error and uncertainty. Therefore, aiming below predicted trajectories may be prudent to increase confidence in a stable climate.


While there is uncertainty around the climate scenario we are heading for, Carbon Action Tracker calculates scenario predictions based on current policies, current pledges and targets being met, and more optimistic targets, where any targets agreed on or under discussion are assumed to be achieved.

Even optimistic targets only predict a median temperature increase of 2.1°C above pre-industrial levels by the year 2100 (see Exhibit 1). Even the lower bound of optimistic targets see us fall short of the 1.5°C target the IPCC steers us toward.

The median expected 2100 warming is around 2.6°C when accounting only for those that have made pledges, while current policies would leave us around 2.9°C, but potentially as high as 3.9°C—a high degree of error built in, given we are currently at 1.1°C above pre-industrial levels.

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Reducing Carbon Exposure in Australian Equities

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Tim Wang

Senior Analyst, Global Research & Design

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Priscilla Luk

Managing Director, Global Research & Design, APAC

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Akash Jain

Director, Global Research & Design

Market participants are ever more cognizant of the impacts of climate change on their investments and are seeking innovative ways to reduce the carbon footprint of their portfolios, while constraining active risk. One such approach proposed in this paper evaluates the adoption of the S&P Global Carbon Efficient Index Methodology by the broad-based S&P/ASX 300.


  • This paper investigates the narrow-selection-based, low-carbon portfolio construction approach and the broad-based S&P Global Carbon Efficient Index Methodology on the S&P/ASX 300, through the lens of portfolio performance and weighted average carbon intensity reduction.
  • The narrow-selection-based, unconstrained low-carbon portfolio had a 92.7% reduction in carbon intensity with a high tracking error of 5.6%. The sector-neutral approach had a moderately lower tracking error of 3.8% but also a lowered carbon intensity reduction of 71.1%.
  • Despite the pronounced carbon intensity reduction, the historical return of the narrow-based, low-carbon portfolios did not show strong evidence that companies with low carbon intensity were rewarded in their price performance, but the active risk was high.
  • The S&P Global Carbon Efficient Index Methodology is a broad-based portfolio approach, with stock weights in the underlying index tilted toward companies with low carbon intensity within each industry group and aims to closely track performance of the underlying index.
  • By applying this construction approach to the S&P/ASX 300, the carbon efficient portfolio mimicked the performance of the underlying index, with a tracking error of 80 bps over the back-tested period and an average carbon reduction of 24.5% versus the benchmark.
  • As of the June 2020 rebalance, the hypothetical S&P/ASX 300 Carbon Efficient portfolio had a carbon reduction of 28% versus the S&P/ASX 300. The top three contributors to the reduction were Energy, Utilities, and Materials.
  • Australian companies in Consumer Durables & Apparels,
    Telecommunication Services, Consumer Services, Transportation, Capital Goods, and Materials tended to be more carbon efficient than their global industry group peers. The opposite was seen in Retailing, Media & Entertainment, and Insurance companies.

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TalkingPoints: Setting a New Low-Carbon Standard with the S&P/NZX Carbon Efficient Indices

To meet the growing demand for sustainable index-based strategies in New Zealand, S&P DJI has launched the S&P/NZX Carbon Efficient Indices, including the S&P/NZX 50 Carbon Efficient Index and S&P/NZX 50 Portfolio Carbon Efficient Index. The index series is designed to incentivize companies to compare their carbon intensity to their industry group peers.

1. Can you share some background on the S&P Carbon Efficient Indices? What are the key elements and objectives that went into creating the S&P/NZX Carbon Efficient Indices?

Ryan: The idea of implementing a carbon efficient methodology to a benchmark index has been around for over a decade, and S&P DJI began launching the S&P Carbon Efficient Indices in 2009.

The key objective behind the index is to apply a weighting methodology that incentivizes companies to compare their carbon intensity to their industry group peers around the world—recognizing that there is global consensus around climate change, and that environmental threats comprise the top five long-term global economic risks. A company's weight may be adjusted positively or negatively based on its carbon intensity; however, companies are not excluded from the index solely due to their carbon intensity.

In addition to the respective comparison to global industry peers, company disclosure of carbon emissions is also reviewed and affects the weight adjustment of the constituent within the index. Utilizing S&P Global Trucost's environmental dataset, we review both the Scope 1 and Scope 2 carbon emission disclosure statuses.

With the launch of the S&P/NZX Carbon Efficient Indices, we have revamped the entire methodology to recognize the carbon impacts of companies by comparing them to their global industry peers, in addition to their peers in New Zealand.

From a performance perspective, the index series is designed to track the baseline S&P/NZX 50 Index and S&P/NZX 50 Portfolio Index closely, with the aim of providing risk/return characteristics that are similar to the benchmarks.

2. What other types of considerations are taken when evaluating constituents for the S&P/NZX Carbon Efficient Indices?

Ryan: With regard to the weight adjustments, one other component we review is the industry group's "impact level," which is classified as high, medium, or low. High impact industry groups include those such as Energy and Materials, whereas low impact industry groups include those such as Media and Financial Services.

There are two factors that we consider for constituent selection, and these are the "High Non-Disclosing Carbon Emitters" and "Controversies Monitoring" screens. As of March 2021, these two screens applied to zero companies in the S&P/NZX 50 Index.

The "High Non-Disclosing Carbon Emitters" screen excludes any company that is deemed to have high carbon emissions while also not disclosing their carbon intensity. This screen is in line with the objective of the index, as it incentivizes the disclosure of environmental impacts even if the company's emissions are high.

The "Controversies Monitoring" screen uses a third-party data source called RepRisk. Index constituent companies are monitored by RepRisk, a leading provider of business intelligence on environmental, social, and governance (ESG) risks. RepRisk analyzes companies for a range of issues including economic crime and corruption, fraud, illegal commercial practices, human rights issues, labor disputes, workplace safety, catastrophic accidents, and environmental disasters. Using these data, each company is assigned a daily RepRisk Index (RRI) indicator.

If RepRisk reports that a company has met or exceeded an RRI indicator of 75, the company will be removed from the index. It will be considered for reinstatement only when it satisfies all the eligibility criteria and its RRI score has remained below 75 on all days since the previous year's rebalancing date.

3. What S&P Global Trucost carbon data are used in the S&P/NZX Carbon Efficient Indices?

Ryan: The carbon efficient index series utilizes the environmental dataset published by S&P Global Trucost. Specifically, the data used are the absolute and intensity figures for carbon emissions, as well as the disclosure status. Carbon intensity is calculated using the Direct + 1st Tier Indirect emissions, which is a combination of Scope 1, 2, and Upstream Scope 3.

S&P Global Trucost's environmental data are comprehensive, covering over 15,000 companies globally, and locally in New Zealand it covers all 50 stocks within the S&P/NZX 50 Index. Data are updated on an annual basis following a strict process that reviews publicly disclosed information, or in the absence of public disclosure, uses a proprietary environmentally extended input-output (EEI-O) model.

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