Portfolio emissions metrics – and the emissions’ performance of key market benchmarks – are under close scrutiny as investors place growing emphasis on monitoring their carbon exposure. Such data is increasingly required for regulatory reporting, and helps to inform decisions on investment products, asset allocation and security selection. However, calculating portfolio emissions remains technically challenging, and resulting data is often hard to interpret.
Now in its third annual edition, this report which is developed in collaboration with the UN-convened Net-Zero Asset Owner Alliance (NZAOA), tracks emissions trends in key market benchmarks across widely used absolute emissions and emissions intensity metrics.
In addition to analysis of Scope 1 and 2 carbon exposures in equity markets (represented by the FTSE All-World index), this year’s report adds a more systematic analysis of Scope 3 portfolio emissions, and, for the first time, expands our work to fixed income, by including an analysis of emissions trends in global investment grade corporate bonds (represented by the FTSE WorldBIG Corp index). We also explore newly proposed metrics, including I-PEP and duration-adjusted WACI for bond portfolios.
Key findings from the report
- Since the conclusion of the Paris Agreement, key financial benchmarks are decarbonising on an intensity basis.
- However, in absolute terms emissions - assessed in terms of ‘chained’ absolute emissions - have continued to slowly increase for equities (by 2.3% pa) and have been largely flat for fixed income (- 0.7% pa) in the same period.
- Portfolio emissions performance can be hard to track on a year-by-year basis because long-term trends are often overshadowed by short-term fluctuations.
- Our attribution analysis shows that this short-term volatility is driven by non-carbon factors – such as constituent churn, sector rotations or changes or adjustments to normalisation factors (for example EVIC).
- Investors should consider a dashboard of portfolio emissions metrics instead of any single measure as individual carbon metrics are regularly impacted by idiosyncratic biases and short-term volatility.
- The immaturity of Scope 3 data makes it challenging to consistently track value-chain emissions on a portfolio basis, but focusing on the most material Scope 3 categories for a sector can reduce volatility and improve the stability and accurate of Scope 3 data.
Points of differentiation
This paper is written in partnership with the UN-Convened Net Zero Asset Owner Alliance (NZAOA), a member led initiative of 89 institutional investors representing US $9.5 trillion in total assets[1], ‘committed to transitioning their investment portfolios to net zero GHG emissions by 2050'.
The report marries how to buy stocks in pse’s deep expertise in portfolio analytics and best-in-class sustainable investment IP to highlight challenges and best practices in evaluating and tracking portfolio decarbonisation over time.
The analysis systematically explains the factors that drive the changes in absolute emissions and emissions intensity metrics. In addition to the analysis of Scope 1 and 2 carbon exposures in equity markets, the report explores Scope 3 emissions within the FTSE All-World Index, through the lens of our priorietary materiality filter, and expands our work to fixed income, by including an analysis of emissions trends in global investment grade corporate debt, using the FTSE World Broad Investment-Grade (WorldBIG) Corporate Bond Index as a representative benchmark.
What does our research mean for you?
The report underscores the critical importance of understanding the root cause of changes in emissions. This research highlights how investors can more effectively measure and track portfolio decarbonisation over time, suggesting that a dashboard of metrics (instead of a single metric) is more sensible, as well as tracking trends over multiple years.
We hope this report will prove to be a crucial resource for investors who are tracking the evolution of their decarbonisation strategies.
Find the reports from the previous two years: Decarbonisation in equity benchmarks: Tracking the portfolio carbon transition (2023) and Decarbonisation in equity benchmarks: smoke still rising (2022).
[1] UN-convened Net-Zero Asset Owner Alliance – United Nations Environment – Finance Initiative (unepfi.org)
Legal Disclaimer
Republication or redistribution of LSE Group content is prohibited without our prior written consent.
The content of this publication is for informational purposes only and has no legal effect, does not form part of any contract, does not, and does not seek to constitute advice of any nature and no reliance should be placed upon statements contained herein. Whilst reasonable efforts have been taken to ensure that the contents of this publication are accurate and reliable, LSE Group does not guarantee that this document is free from errors or omissions; therefore, you may not rely upon the content of this document under any circumstances and you should seek your own independent legal, investment, tax and other advice. Neither We nor our affiliates shall be liable for any errors, inaccuracies or delays in the publication or any other content, or for any actions taken by you in reliance thereon.
Copyright ? 2024 London Stock Exchange Group. All rights reserved.
The content of this publication is provided by London Stock Exchange Group plc, its applicable group undertakings and/or its affiliates or licensors (the “LSE Group” or “We”) exclusively.
Neither We nor our affiliates guarantee the accuracy of or endorse the views or opinions given by any third party content provider, advertiser, sponsor or other user. We may link to, reference, or promote websites, applications and/or services from third parties. You agree that We are not responsible for, and do not control such non-LSE Group websites, applications or services.
The content of this publication is for informational purposes only. All information and data contained in this publication is obtained by LSE Group from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data are provided "as is" without warranty of any kind. You understand and agree that this publication does not, and does not seek to, constitute advice of any nature. You may not rely upon the content of this document under any circumstances and should seek your own independent legal, tax or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Neither We nor our affiliates shall be liable for any errors, inaccuracies or delays in the publication or any other content, or for any actions taken by you in reliance thereon. You expressly agree that your use of the publication and its content is at your sole risk.
To the fullest extent permitted by applicable law, LSE Group, expressly disclaims any representation or warranties, express or implied, including, without limitation, any representations or warranties of performance, merchantability, fitness for a particular purpose, accuracy, completeness, reliability and non-infringement. LSE Group, its subsidiaries, its affiliates and their respective shareholders, directors, officers employees, agents, advertisers, content providers and licensors (collectively referred to as the “LSE Group Parties”) disclaim all responsibility for any loss, liability or damage of any kind resulting from or related to access, use or the unavailability of the publication (or any part of it); and none of the LSE Group Parties will be liable (jointly or severally) to you for any direct, indirect, consequential, special, incidental, punitive or exemplary damages, howsoever arising, even if any member of the LSE Group Parties are advised in advance of the possibility of such damages or could have foreseen any such damages arising or resulting from the use of, or inability to use, the information contained in the publication. For the avoidance of doubt, the LSE Group Parties shall have no liability for any losses, claims, demands, actions, proceedings, damages, costs or expenses arising out of, or in any way connected with, the information contained in this document.
LSE Group is the owner of various intellectual property rights ("IPR”), including but not limited to, numerous trademarks that are used to identify, advertise, and promote LSE Group products, services and activities. Nothing contained herein should be construed as granting any licence or right to use any of the trademarks or any other LSE Group IPR for any purpose whatsoever without the written permission or applicable licence terms.
Related articles
Find out more
Further information about how to buy stocks in pse