On the brink of irreversible climate change, a combination of ground-breaking datasets and index innovation is emerging, through which investors will have the choice to align their investments to a future climate scenario compatible with mitigating catastrophic global warming to the planet. This new breed of sustainable climate indices will not only offer solutions that intend to be impactful, but equally aim to provide investors with reduced risks from transitioning to a low-carbon economy and the consequences of physical, environmental events while capturing financial opportunities that arise.
Based on scientific evidence around the need for a 1.5°C1 global warming scenario to be hit (Masson-Delmotte, et al., 2018), the EU Technical Expert Group (TEG) has released its final report (The EU Technical Expert Group on Sustainable Finance, 2019), outlining two new climate benchmarks. This paper describes an S&P Dow Jones Indices (S&P DJI) concept for the eurozone region, which is aligned with the more stringent of these two new climate benchmarks: the Paris-Aligned Benchmark.
The index concept uses pioneering, forward-looking Trucost datasets to meet multiple climate objectives, aligned with a 1.5°C scenario and the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, while incorporating the Science Based Targets Initiatives-endorsed climate transition approaches and state-of-the-art Trucost physical risk data.
Exhibit 1: Data Inputs into the PAC Concept
Exhibit 1 outlines the inputs into the S&P Eurozone Paris-Aligned Climate Index Concept (PAC Concept), which enable the climate objectives achievement. This paper outlines how climate-related objectives can be met, due to the use of optimization, while maintaining similar performance to the underlying index, with low tracking error. This results in a broad, diversified index that should perform similarly to the underlying index. Factor analysis shows there to be unexplained alpha that may be driven by the climate strategy of the PAC Concept.
1 Global warming should not exceed 1.5°C above pre-industrial levels.
2 A part of S&P Global.