The S&P Carbon Efficient Indices are designed to reduce exposure to high-carbon companies in a systematic way, while maintaining a risk/return profile similar to that of their benchmarks.
The indices do this by adjusting constituents’ weights according to their relative carbon-to-revenue footprint. These carbon weight adjustments are calculated using the S&P Carbon Global Standard, a proprietary carbon classification system.
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.
Institutional investors, including Japan’s GPIF, are increasingly integrating ESG into their strategies. S&P DJI's Andrew Innes is joined by S&P Global Trucost’s Neil McIndoe to talk about how the innovative S&P Carbon Efficient Indices are being used as institutional portfolio building blocks.
Starting with a market-cap index as the universe, companies are screened for liquidity and to remove companies certified as “High Non-Disclosing Carbon Emitters.” Remaining companies are included in the index.
Constituent companies are weighted based on an approach that accounts for whether they sufficiently disclose their carbon emissions, their carbon-to-revenue footprint ranking relative to industry peers, and whether their industry is classified as high-, low-, or mid-impact.
The indices are rebalanced annually. Companies may be removed between rebalancings based on controversies monitoring.
Carbon-to-Revenue Footprint Assessment
Fundamental to the construction of the S&P Carbon Efficient Indices are companies’ carbon-to revenue footprints, which are calculated by S&P Global Trucost, an ESG analytics specialist. Footprints are assessed for each company in S&P Global Trucost’s coverage universe as follows:
Companies within S&P Global Trucost’s coverage universe that do not have a recent disclosed annual carbon footprint are assigned one based on an estimate using S&P Global Trucost’s proprietary Input-Output model.
Direct and First-Tier Indirect Greenhouse Gas Emissions
To calculate the annual greenhouse gas (GHG) emissions (direct and first-tier indirect) used as inputs for each company’s carbon-to-revenue footprint assessment, S&P Global Trucost measures:
This gives a more complete view of the degree to which each company is carbon-exposed.
The S&P Carbon Global Standard is a proprietary carbon classification system that uses companies’ carbon-to-revenue footprint data to create a framework for weighting constituents and calculating index values.
Decile thresholds are determined for each GICS® industry group based on the carbon-to-revenue footprints of companies in the S&P Global LargeMidCap, a global benchmark. Using these thresholds, every company is then classified, independently of its index membership, into its S&P Carbon Global Standard decile.
Each industry group is identified as high-, mid- or low-impact. This classification is based on the range of carbon-to-revenue footprints across the companies within that industry group in the S&P Global LargeMidCap. The range for each industry group is calculated as the spread between its first and last decile threshold.
Companies are divided into those that have been identified by Trucost as having sufficiently disclosed their carbon emissions and those that have not. Disclosure status is achieved when Trucost identifies companies as having full or partial disclosure in its largest carbon emissions category (between scope 1 and 2).
Carbon Weight Adjustments
Each S&P Carbon Efficient Index seeks to maintain the respective industry group weights of its underlying index. It does this while adjusting constituent weights within each industry group to reduce overall exposure to carbon emissions per unit of revenue, as follows:
Index constituent companies are monitored by RepRisk, a leading provider of business intelligence on environmental, social, and governance 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 this 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.
About S&P Global Trucost
S&P Global Trucost is a leader in carbon and environmental data and risk analysis. S&P Global Trucost assesses risks relating to climate change, natural resource constraints, and broader environmental, social, and governance factors.
S&P Global Trucost sheds light on the environmental performance of 14,000 companies, representing 99% of global market capitalization, through a four-step research process. For more details, read S&P Global Trucost’s methodology.
Learn more about our ESG indices, services, and solutions.