One of the key objectives for the recently launched S&P/JPX Carbon Efficient Index is to motivate companies within the baseline index, TOPIX, to increase their level of environmental disclosure. By incorporating a mechanism to adjust constituent weights by their respective environmental data, the S&P/JPX Carbon Efficient Index has been designed to incentivize all companies, regardless of their GICS® industry group, to decrease their carbon emissions relative to their peers and to disclose their environmental impact information.
The S&P/JPX Carbon Efficient Index takes into consideration three different criteria of the S&P Carbon Global Standard when adjusting the constituent weights of the index. The S&P Carbon Global Standard is updated annually at each rebalance reference date using the global universe, the S&P Global LargeMidCap. In Exhibit 1, we present the three different adjustment criteria, and how the carbon weight adjustment may have affected the constituent weights within the S&P/JPX Carbon Efficient Index.
The decile classification, determined by the S&P Carbon Global Standard, is created by finding the decile thresholds for each of the GICS industry groups based on carbon revenue footprints. Using these thresholds, the eligible constituent universe for the S&P/JPX Carbon Efficient Index is then bucketed into its respective decile classification.
The breakdown of the companies within the S&P/JPX Carbon Efficient Index is relatively evenly distributed among the deciles (see Exhibit 2).
The average percent change of constituent weights shows that there is a significant difference (22% versus -34%) in how the weights are adjusted between companies that have lower carbon-to-revenue footprints compared with those in the bottom three deciles.
One of the key goals of the S&P/JPX Carbon Efficient Index is to increase carbon disclosure among the constituents. To achieve this objective, individual companies have been categorized as either “disclosed” or “non-disclosed,” with increased weight allocated to the former. As indicated in Exhibit 1, the difference in weight between disclosed and non-disclosed companies is 10% for each respective decile.
Of the Japanese companies measured by TOPIX, 22.91% have been identified as disclosed companies (see Exhibit 3). When compared to the universe of companies within the S&P Global Ex-Japan LargeMidCap Carbon Efficient Index, which has a 63.55% disclosure rate, it is clear that Japanese companies still have a long way to go for corporate disclosures.
While the disclosure status of a company may not have as big of an impact on the weight adjustment compared to its respective decile, it is clear that it is beneficial for companies to disclose carbon emissions. While the increase in weight may not appear to be significant, the 8.62% decrease in weight as a result of being classified as a non-disclosed company can be quite significant.
Industry Group Impact Factor
When there is a low range of carbon emissions within an industry group, the overall impact on the portfolio of a single company improving their carbon-to-revenue footprint will be low. On the other hand, if a company in an industry group that has a tendency to have a high amount of carbon emissions (such as those from the Energy or Materials sectors) were to improve its carbon-to-revenue footprint, it would potentially make a big impact on the overall portfolio’s carbon-to-revenue footprint.
As a component of the S&P Global Carbon Standard, each GICS industry group is classified as high, mid, or low impact, depending on the range of the carbon-to-revenue footprint, and a larger weight adjustment is made for companies in high impact industry groups (see Exhibit 4).
A high impact classification does not necessarily imply that the industry group is bad for the environment. Because this classification is determined by the range of the carbon-to-revenue footprint within an industry group, it is likely that a high impact industry group is not universally efficient, and thus may have a high opportunity for companies to review their environmental data, which could make it a leader within their respective industry. As the range of carbon-to-revenue footprints within an industry group decreases, it is likely that the companies within the industry group are operating their businesses in the most efficient manner relative to its peers.
The statistics provided in this report are based on constituent weights as of Oct. 31, 2018, and the carbon disclosure information as of the index rebalancing reference date (February 2018).
For the purposes of this report, only constituents that had reported Trucost data at the time of the index rebalancing reference date are included. Since the rebalancing reference date in 2018, Trucost has expanded the amount of coverage companies globally to over 14,000 and has over 99% coverage of TOPIX, as a percentage of total market capitalization.
The TOPIX Index Value and the TOPIX Marks are subject to the proprietary rights owned by the Tokyo Stock Exchange, Inc. and the Tokyo Stock Exchange, Inc. owns all rights and know-how relating to the TOPIX such as calculation, publication and use of the TOPIX Index Value and relating to the TOPIX Marks.