A Visual Guide to 5 Types of Climate Indexes

The following content is sponsored by MSCI.

A Visual Guide to 5 Types of Climate Indexes

If average temperatures continue to rise at their current rate:

  • 10% of the world’s economic value could be lost by 2050
  • A sea level rise of over 8 feet could flood coastal cities
  • 420 million people could be exposed to extreme heat waves

To prevent the worst effects of climate change, climate experts believe we need to drive carbon emissions down to net-zero.

This infographic from MSCI shows five climate indexes that can help align investor portfolios to the goals of the Paris Agreement, mitigate emissions, and reduce fossil fuel exposure.

What is Net-Zero?

Net-zero targets are a clearly marked pathway for companies to reduce greenhouse gas (GHG) emissions in line with the Paris Agreement.

The Paris Agreement’s goal is to limit global warming to well below 2°C, preferably no more than 1.5°C above pre-industrial levels. Investors have a critical role to play in this transition to net-zero.

5 Types of Climate Indexes

First, here are the key metrics used to assess the environmental profile of indexes:

  • Carbon emissions: Based on tons of carbon dioxide across all constituents divided by millions of dollars invested in the index (tons CO2e/$M invested).
  • Carbon intensity: Based on tons of carbon dioxide per $1 million in sales (tons CO2e/$M sales).

Let’s look at five types of climate indexes from MSCI:

1. Climate Paris Aligned Indexes

Objective: Reduce carbon intensity by 50% compared to benchmark, annual decarbonization of 10%, increase weight in green solutions companies.

The indexes have also shown strong performance on the Climate Value at Risk (Var) metric.

Climate Var provides a forward-looking return-based assessment of how climate change could affect company valuations. For instance, a holder of MSCI ACWI would likely see an erosion of portfolio value by about 14.44% if the world were to decarbonize in line with a 1.5°C warming scenario.

A holder of a Climate Paris Aligned Index, by contrast, would see little to no erosion in value.

Metric Description Climate Paris Aligned Index Benchmark Index
What was the historical climate performance? 88% lower carbon emissions than the reference index 11 tons CO2e/$ million invested 89 tons CO2e/$ million invested
Key climate feature* Climate Value at Risk (Var) 0% -14.44%
Index performance
(Five-year annualized return as of Sep 30 2021)
Outperformed benchmark MSCI ACWI Index 15.40% 13.80%

*As of May 2021 semi-annual index review

2. Climate Change Indexes

Objective: Reduce carbon emission intensity by 30% compared to benchmark, annual decarbonization of 7%, increase weight in green opportunity companies.

Green opportunity companies may include green bonds, companies with low carbon patents, or provide exposure to UN Sustainable Development Goals. These are companies which see opportunity from the climate transition.

Metric Description Climate Change Index Benchmark Index
What was the historical climate performance? 62% lower carbon emissions than reference index 34 tons CO2e/$M invested 89 tons CO2e/$M invested
Key climate feature Carbon intensity is at least 50% lower than that of the benchmark 32 tons CO2e/$M sales 205 tons CO2e/$M sales
Index performance
(Five-year annualized return as of Sep 30 2021)
Outperformed benchmark MSCI ACWI Index 15.70% 13.80%

3. Low Carbon Target Indexes

Objective: Minimize carbon footprint by 50% based on exposure to carbon emissions and fossil fuel reserves.

The carbon footprint covers two key metrics:

  • Low carbon emissions (relative to sales)
  • Low potential carbon emissions (per dollar of market capitalization)
Metric Description Low Carbon Target Index Benchmark Index
What was the historical climate performance? 78% lower carbon emissions than the reference index 20 tons CO2e/$M invested 89 tons CO2e/$M invested
Key climate feature Minimize carbon intensity 66 tons CO2e/$M sales 156 tons CO2e/$M sales
Index performance
(Five-year annualized return as of Sep 30 2021)
Performed equally to MSCI ACWI Index benchmark 13.80% 13.80%

4. Fossil Fuels Exclusion Index

Objective: Represent broad market performance while excluding companies that own oil, gas and coal reserves.

Metric Description Fossil Fuels Exclusion Index Benchmark Index
What was the historical climate performance? Carbon emissions were reduced by 34% compared to the reference index 59 tons CO2e/$M invested 89 tons CO2e/$M invested
Key climate feature Proportion of index invested in fossil fuel reserves 0% 5%
Index performance (Five-year annualized return as of Sep 30 2021) Outperformed benchmark MSCI ACWI Index 14.30% 13.80%

5. Environment Indexes

Objective: Select companies that derive at least 50% of their revenues from environmentally beneficial products and services.

The green to fossil fuel-based net revenue exposure compares revenues from green companies in relation to companies with revenues from fossil fuel. This can be used as a metric to assess the shift from fossil fuel-related activities to greener alternatives.

Metric Description Environment Index Benchmark Index
What was the historical climate performance? Included companies that derive at least 50% of revenues from green energy* 99% 9.10%
Key climate feature Green/fossil fuel-based net revenue exposure 192.7 3
Index performance
(Five-year annualized return as of Sep 30 2021)
Outperformed benchmark MSCI ACWI Index 23.60% 13.80%

*Cumulative measure across holdings, includes alternative (renewable) energy, green buildings, sustainable water and pollution prevention

Climate Indexes: Tools for Addressing Climate Change

As investors integrate climate concerns in their portfolios, they can use indexes from MSCI to help make more informed decisions.

Climate indexes can help investors:

  1. Align with global climate goals
  2. Capture opportunities
  3. Mitigate transition and physical risks
  4. Reduce fossil fuel exposure

These climate tools can help investors with future investment strategies—and catalyze change.

The post A Visual Guide to 5 Types of Climate Indexes appeared first on Visual Capitalist.

Previous post Visualizing the State of Global Debt, by Country
Next post US economy forecast to hit wall
Close
Translate »