MITIGATING CLIMATE CHANGE WITH LOW CARBON INVESTMENTS
Some investors may want to get the most out of the leading sustainable companies only, while others would consider companies and their whole supply chain additionally.
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Last year’s United Nations Climate Change Summit in Paris concluded with the adoption of a momentous agreement between nearly 200countries to limit global warming below 2°C, clearly signaling that the world is ready to take a step in the right direction to mitigate climate change.Though primarily a political signal, the agreement has increased pressure on companies along with investors.
One major message of the climate change conference was that carbon emissions will no longer be economically justifiable in any business model in the future. In recent years, it has become apparent that fossil energy has no bright investment future. Long-term investors in particular are becoming increasingly aware of the risks climate change presents to their assets. Several leading institutional investors, like the Norwegian Sovereign Wealth Fund or Allianz Group, have decided not to invest in businesses relying on fossil energy.This decision is forward-looking: A change towards a more sustainable investment approach is also demanded from governmental side. In 2015,France has introduced mandatory carbon reporting for portfolios of pension funds, insurance companies and other institutional investors.Other countries want to implement similar obligations as governments are pushing hard. Obviously, institutional investors are expected to reflect the growing concerns about climate change in their portfolios.
So far, however, it has not been as easy to implement sustainable investments.Pension funds for example are often obligated to follow a per-defined benchmark. As a result, and in order to avoid undesired tracking errors they can only rely on indices that embed low carbon filters. Some investors may want to get the most out of the leading sustainable companies only, while others would consider companies and their whole supply chain additionally.
Reliable and independent data as the basis for sustainable indices
Reliable and certified data are the basis for any low carbon strategy.Yet, many investors do not have the time and expertise to analyze the carbon emissions of every company or do not have access to all necessary data. Therefore more than 800investors, who account for more than one third of assets worldwide,rely on the data of CDP – the former Carbon Disclosure Project – a leading international non-governmental organization. CDP manages the world’s largest database of its kind with information on more than2,000 listed companies. Its data helps investors to analyze the environmental risks and financial opportunities across their portfolios.
STOXX partnered with CDPto use their data set of corporate environmental information as a high quality source to calculate the STOXX Low Carbon index family that was introduced earlier this year. The index family provides various strategies from re weighting broad benchmark and blue chip indices such as EUROSTOXX 50 and STOXX Europe 600 by over weighting low-emitters and tilting away from high-emitters, all the way to options to divest from high carbon emitting companies. They are efficient and transparent tools to facilitate the implementation of sustainable investment strategies.
Climate change risks and opportunities hidden in supply chains
According to CDP, the companies’ own emissions often account for just15 to 25 per cent of the total emissions across their supply chain, a fact not considered in the majority of cases.There is a small group of companies that besides implementing programs to reduce their own emissions, also employ strategies to reduce emission of their whole supply chain. These companies are rewarded with a place on CDP’s A list, based on their emissions reduction actions and results.This group is recognized as being the most transparent and fact based. The selection criteria are strict: Just 113companies worldwide were included in the 2015 A list. Investors can invest in this holistic approach with the helpof the STOXX Global Climate Change Leaders Index. Hence, they can support the forward-looking, effective strategies and significantly reduce climate risks in their portfolio straightaway. The index has reduced carbon emissions by nearly80 per cent with annualized returns of more than nine per cent over the past three years.
The UN Climate Summit has underlined the importance of minimizing global carbon emissions in the future. Many governments and companies are aware of their responsibilities and investors can support their efforts. Passive investing is a crucial part of being prepared for future investment requirements. Low carbon index strategies do not only cater to a social responsible investment approach, but have shown to perform similar or even better than their traditional counterparts.