To meet the growing demand for sustainable index-based strategies in New Zealand, S&P DJI has launched the S&P/NZX Carbon Efficient Indices, including the S&P/NZX 50 Carbon Efficient Index and S&P/NZX 50 Portfolio Carbon Efficient Index. The index series is designed to incentivize companies to compare their carbon intensity to their industry group peers.
1. Can you share some background on the S&P Carbon Efficient Indices? What are the key elements and objectives that went into creating the S&P/NZX Carbon Efficient Indices?
Ryan: The idea of implementing a carbon efficient methodology to a benchmark index has been around for over a decade, and S&P DJI began launching the S&P Carbon Efficient Indices in 2009.
The key objective behind the index is to apply a weighting methodology that incentivizes companies to compare their carbon intensity to their industry group peers around the world—recognizing that there is global consensus around climate change, and that environmental threats comprise the top five long-term global economic risks. A company's weight may be adjusted positively or negatively based on its carbon intensity; however, companies are not excluded from the index solely due to their carbon intensity.
In addition to the respective comparison to global industry peers, company disclosure of carbon emissions is also reviewed and affects the weight adjustment of the constituent within the index. Utilizing S&P Global Trucost's environmental dataset, we review both the Scope 1 and Scope 2 carbon emission disclosure statuses.
With the launch of the S&P/NZX Carbon Efficient Indices, we have revamped the entire methodology to recognize the carbon impacts of companies by comparing them to their global industry peers, in addition to their peers in New Zealand.
From a performance perspective, the index series is designed to track the baseline S&P/NZX 50 Index and S&P/NZX 50 Portfolio Index closely, with the aim of providing risk/return characteristics that are similar to the benchmarks.
2. What other types of considerations are taken when evaluating constituents for the S&P/NZX Carbon Efficient Indices?
Ryan: With regard to the weight adjustments, one other component we review is the industry group's "impact level," which is classified as high, medium, or low. High impact industry groups include those such as Energy and Materials, whereas low impact industry groups include those such as Media and Financial Services.
There are two factors that we consider for constituent selection, and these are the "High Non-Disclosing Carbon Emitters" and "Controversies Monitoring" screens. As of March 2021, these two screens applied to zero companies in the S&P/NZX 50 Index.
The "High Non-Disclosing Carbon Emitters" screen excludes any company that is deemed to have high carbon emissions while also not disclosing their carbon intensity. This screen is in line with the objective of the index, as it incentivizes the disclosure of environmental impacts even if the company's emissions are high.
The "Controversies Monitoring" screen uses a third-party data source called RepRisk. Index constituent companies are monitored by RepRisk, a leading provider of business intelligence on environmental, social, and governance (ESG) risks. RepRisk analyzes companies for a range of issues including economic crime and corruption, fraud, illegal commercial practices, human rights issues, labor disputes, workplace safety, catastrophic accidents, and environmental disasters. Using these data, each company is assigned a daily RepRisk Index (RRI) indicator.
If RepRisk reports that a company has met or exceeded an RRI indicator of 75, the company will be removed from the index. It will be considered for reinstatement only when it satisfies all the eligibility criteria and its RRI score has remained below 75 on all days since the previous year's rebalancing date.
3. What S&P Global Trucost carbon data are used in the S&P/NZX Carbon Efficient Indices?
Ryan: The carbon efficient index series utilizes the environmental dataset published by S&P Global Trucost. Specifically, the data used are the absolute and intensity figures for carbon emissions, as well as the disclosure status. Carbon intensity is calculated using the Direct + 1st Tier Indirect emissions, which is a combination of Scope 1, 2, and Upstream Scope 3.
S&P Global Trucost's environmental data are comprehensive, covering over 15,000 companies globally, and locally in New Zealand it covers all 50 stocks within the S&P/NZX 50 Index. Data are updated on an annual basis following a strict process that reviews publicly disclosed information, or in the absence of public disclosure, uses a proprietary environmentally extended input-output (EEI-O) model.
