Introduction
The impacts of climate change are becoming more evident every year, presenting a material systemic risk to the global economy. Consequently, for market participants, this translates into a duty to manage climate-related risks and opportunities within their portfolios. In response, the investment landscape has evolved beyond simple negative screening of high-emitting stocks toward more sophisticated and customized strategies that are designed to incorporate more methodical ways to address exposure to carbon within portfolios. The S&P Global Carbon Efficient Index Series represents a foremost example of this evolution, offering a powerful, rules-based framework to exclude companies classified as high non-disclosing carbon emitters, all while maintaining broad market weight and incentivizing companies to improve their disclosure and emissions performance.
This paper explores the methodology and market impact of the S&P Global Carbon Efficient Index Series and paints a picture of how the methodology has stood the test of time. We will conduct a deep dive into the S&P/JPX Carbon Efficient Index and S&P Global Ex-Japan LargeMidCap Carbon Efficient Index, using the high-profile adoption by Japan’s Government Pension Investment Fund (GPIF) as a definitive case study. This analysis will illustrate how a well-designed index can serve as a powerful catalyst, not only helping market participants achieve their climate objectives but also fostering a market-wide improvement in corporate climate disclosure, performance and transparency.
The Carbon Efficient Mechanism: A Disciplined Approach
The core principle of the S&P Global Carbon Efficient Index Series is to systematically tilt the index toward more carbon-efficient companies, without resorting to broad exclusions that can narrow the investment universe and introduce unintended biases.
Methodology Deep Dive
The index series begins with a standard, broad-based benchmark index, which is weighted by free-float-adjusted market cap, e.g., the TOPIX for Japan. It then reweights each constituent company based on its carbon efficiency score, which is derived from S&P Global Trucost data measuring greenhouse gas emissions relative to revenue (metric tons of CO2e / USD 1 million in revenue). This is achieved by applying a “Carbon Weight Adjustment Factor” to each company’s market-cap weight. This mechanism increases weights for companies that are more carbon-efficient and transparent relative to their industry peers, while reducing weights for higher-emitting or non-disclosing companies. The highest impact companies, i.e., the biggest emitters, which do not disclose their carbon emissions, are excluded from the index. The reweighting is performed on a sector-neutral basis—company weights are adjusted within Global Industry Classification Standard (GICS®) industry groups, with the objective of minimizing deviations from the benchmark’s industry group weightings. This discipline ensures that the index’s performance profile is driven by the specific selection of more efficient companies, not by unintended bets for or against certain sectors of the economy.
Performance and Risk Profile
By avoiding broad business activity exclusions and maintaining sector neutrality, the methodology has seen historically low tracking error across all geographic variants of the index series. Historical analysis of these strategies in markets across Asia and globally has shown they can deliver a measurement of significant carbon reduction without sacrificing long-term performance.
