Pain Points

The CEO, CIO, and Head of Responsible Investment realized that the organization needed to take its climate strategy to a new level and create a clear plan for reaching net zero. Working along with prospective investors they wanted a diversified index aligned with the EU’s minimum standards for Paris-Aligned Benchmark (Regulation (EU) 2016/1011) to serve as a building block to achieve their net zero goals. In addition, it was important that the index:

• Capture several types of climate risk. This should include physical risks associated with frequent and extreme weather events (e.g., hurricanes) or the longer-term effects of climate change (e.g., sea level rise), plus transition risks associated with moving to a low-carbon economy (e.g., carbon pricing policies).
• Have a forward-looking perspective. The index should reflect transitioning in line with the 1.5°C objective of the Paris Agreement to align with the pension Pool clients’ goal of continuing to increase exposure to companies with present and projected carbon emissions within their 1.5°C carbon budget.
• Be transparent. It was essential that the pension Pool clearly understand the underlying index methodology for selecting and reweighting companies to assess if it met the Pool’s goal of driving real-world change.

The pension Pool contacted S&P Dow Jones Indices (S&P DJI) to learn more about the firm’s index offerings.

The Solution

S&P DJI proposed the S&P PACT^TM Indices (S&P Paris-Aligned & Climate Transition Indices), which are designed to measure the performance of eligible equity securities, selected and weighted to be collectively compatible with a 1.5ºC global warming climate scenario, in addition to several other climate-themed objectives. The S&P PACT Indices are designed to meet the requirements of the EU’s minimum standards for climate benchmark labels , including Paris-Aligned Benchmarks (PABs) (Regulation 2016/1011), making them timely net zero investment tools. In fact, the S&P PACT Indices go beyond the EU’s minimum standards, as shown in Figure 1. The methodology comprises multiple climate objectives. Of these requirements, just one stems from the requirements of the EU PAB label, which is the initial 50% reduction in relative greenhouse gas (GHG) emission intensity, followed by a 7% year-on-year absolute self-decarbonization of the index to align with carbon neutrality/net zero by 2050, using Scopes 1, 2, and 3 emissions.² The S&P PACT Indices methodology can be found here.

S&P PACT Index Methodology Inputs

The S&P PACT Indices leverage data from across the S&P Global enterprise, including S&P Global Trucost datasets. The remaining six inputs are intended to address additional climate objectives incorporated in the index methodology: 

All of the above climate objectives are simultaneously approached through an optimization that seeks to minimize deviations from the underlying benchmark in terms of active share. The S&P PACT Indices solution is designed to aid the pension Pool to fulfill its objectives.

Sample S&P Global Datasets Leveraged for the S&P PACT Indices are designed for the following purposes:

Key Benefits

The CEO, CIO, and Head of Responsible Investment quickly saw many advantages of the S&P PACT Indices relative to other strategies that were reviewed. As a result the Pool selected and subscribed to the index offering. In particular, the responsible individuals valued having:

• Indices that align with a 1.5°C trajectory, while maintaining broad, diversified asset exposure.
• Indices that seek to meet the EU‘s minimum standards for PABs under Regulation 2016/1011 and the TCFD‘s recommendations using S&P Global Trucost datasets that informs both transition and physical risks.
• Index weights relative to the benchmark index, that are clearly attributable to climate and ESG factors.
• A forward-looking perspective that increases exposure to companies with present and projected carbon emissions within their 1.5°C carbon budget.
• A thoroughly transparent rules-based structure supported by methodology research and other educational pieces.
• The ability to save costs through index-based investing, which is low cost relative to active management.

The S&P Developed Ex-Korea LargeMidCap Net Zero 2050 Paris Aligned ESG Index is proprietary to S&P Dow Jones Indices. The fund based on the S&P Developed Ex-Korea LargeMidCap Net Zero 2050 Paris Aligned ESG Index is not managed, sponsored, endorsed, marketed or promoted by S&P DJI or its affiliates and neither S&P DJI nor its affiliates have any liability with respect thereto.