The S&P Eurozone Paris-Aligned Climate index concept has been developed in order to be aligned with the EU Technical Expert Group’s “Final Report on Climate Benchmarks and Benchmarks’ ESG Disclosures” in September 2019.
The EU Commission report agreed to the publication of two types of climate benchmarks; the EU Climate Transition benchmark (CTB) and the EU Paris-aligned benchmark (PAB).
Although detailed rules on the benchmarks are yet to be published, SPDJI has defined its approach based on the EU’s final report last September.
The main objectives of the EU’s benchmarks are to:
- Allow a significant level of comparability of climate benchmarks methodologies while leaving benchmarks’ administrators with an important level of flexibility in designing their methodologies
- Provide investors with an appropriate tool that is aligned with their investment strategy
- Increase transparency on investors’ impact, specifically with regard to climate change and the energy transition
- Disincentivise greenwashing
The index concept aims to offer clients impactful solutions to climate change along with providing investors with reduced risks from transitioning to a low-carbon economy.
The index concept uses Trucost datasets to meet multiple climate objectives such as:
- Overweighting companies more aligned with a 1.5°C scenario based on the use of transition pathway methodologies, as endorsed by the Science Based Targets Initiative, to encourage the index to organically decarbonise
- Reducing the index carbon footprint by 7% year-on-year, to ensure no overshoot
- Overweighting companies with strong environmental policies
- Reducing exposure to companies with fossil fuel reserves, which may pose stranded asset risk
- Overweighting companies that have set science-based targets and meet specific criteria to avoid greenwashing; and
- Incorporating scope 3 carbon emissions data, both upstream and downstream, to show a more complete view of company’s carbon footprint on the world
It also accesses climate opportunities by overweighting companies with greater exposure to green sectors, such as renewable energy.
Ben Leale-Green, analyst, research and design, ESG indices at SPDJI, and co-author of the report, commented: “When looking further into the future, if we do not limit warming to 2°C, or at the very least ensure carbon neutrality, the consequences could be even more dramatic.
“Within the overall scientific community, there is a consensus on the need for the world to decarbonise, which has been supported by scientific research and has inspired these new EU regulatory proposals.
“The index concept has been designed not only with the regulation in mind, but also to encompass risks and opportunities of climate change, as set out by the Task Force on Climate-related Financial Disclosures, while meeting the proposed regulation from the TEG.”
SPDJI is not the first index provider to launch indices in response to these new EU rules. Last November, MSCI announced it had launched two series of provisional climate indices.