FTSE Russell has joined other index providers in launching an eight-strong suite of indices linked to the European Union’s Paris-aligned Benchmark (PAB).
The indices tracking the PAB will apply the FTSE Target Exposure Framework to tilt exposure away from companies with high carbon emissions, high fossil fuel reserves and will prevent overweighting to the banking sector.
Meanwhile, they will tilt favourably towards companies with higher relative green revenues, better management on climate issues and those with stronger emissions reduction targets.
The goal of these metrics is to align FTSE Russell’s new climate-themed benchmarks with the goals of the Paris Agreement including keeping global warming below two degrees Celsius by 2050.
The new suite covering equities from FTSE All-World, FTSE Developed, FTSE Emerging, Russell 1000, FTSE All-Share and FTSE Australia 200 markets:
- FTSE All-World Paris-aligned (PAB) Index
- FTSE Developed Paris-aligned (PAB) Index
- FTSE Developed Europe ex UK Paris-aligned (PAB) Index
- FTSE Developed ex Australia Paris-aligned (PAB) Index
- FTSE Emerging Paris-aligned (PAB) Index
- FTSE All-Share Paris-aligned (PAB) Index
- FTSE Australia 200 Paris-aligned (PAB) Index
- Russell 1000® Paris-aligned (PAB) Index
By tracking the PAB, the indices will target a 50% reduction in carbon emissions over a ten-year period versus the parent universe while incorporating analysis from the Transition Pathway Initiative (TPI) on how the largest and most carbon-exposed companies are managing the climate transition.
As well as being classified under Article 9 of the Sustainable Finance Disclosure Regulation (SFDR), FTSE Russell said it consulted £35bn Local Government Pension Scheme provider, Brunel Pension Partnership, on the construction of its new EU climate series.
The upshot of this is the firm’s climate approaches will be aligned with the guidance provided in the IIGCC Net Zero Investment Framework, which means its new suite will exclude all companies deriving more than 50% of revenues from thermal coal or oil sands.
Furthermore, Brunel Pension Partnership has licenced a FTSE Russell PAB index as an option for the provider’s passively-managed fund in September 2021 and plans to use the PAB index range in the management of climate risk across its active equity funds range.
Aled Jones, head of SI product management, EMEA at FTSE Russell, commented: “Major asset owners are increasingly using climate benchmarks as an effective way to both quantify, and respond to, climate risks and opportunities. We are continuing to see rapid adoption of climate-themed indices and data sets, especially in the UK and continental Europe.
“Brunel Pension Partnership, who we closely worked with in the development of these indices, now plans to utilise one of the new indices for a passive equity fund, while also shifting performance benchmarks for its considerable suite of actively-managed funds.”
Faith Ward, chief responsible investment officer at Brunel Pension Partnership, added: “Our work with the IIGCC to help launch the Net Zero Investment Framework and consulting FTSE Russell for its new Paris-aligned index series have been priority projects for Brunel. We hope these projects provide practical investor tools to reduce climate related financial risk and support the climate transition.”
Later in 2021, FTSE Russell plans to launch another series of equity indices within the upcoming range set to be aligned with EU Climate transition Benchmark (CTB) criteria.
The new index series also follows the firm’s announcement that it had earmarked a tenth of the constituents within its FTSE4Good range for removal. Unless the 208 companies in question improve their scores on climate metrics, they will be expelled from the benchmark suite within the next 12 months.