The increasing focus on sustainability inclusion is being reflected through the markets’ growing recognition of the financial materiality and impact of ESG issues on corporate balance sheets. Therefore, the range of ESG offerings has expanded to include indices that focus on climate change, carbon efficiency, fossil fuel free, and thematics, which include clean energy and water indices.
The 2016 Paris Climate Agreement resulted in many countries pledging to net zero goals. Net zero, also referred to as carbon neutrality, is the scenario wherein the carbon or greenhouse emissions are balanced by absorbing the same from the atmosphere. Since there are certain industries such as chemical, steel, cement, and some others that cannot achieve absolute zero targets, the goal is to create a “net zero” target. The negative impact of global warming has been recognized worldwide, and action is being taken across industries. Regulators, product providers, and investors have also joined the cause by taking stock of the climate risks in their holdings and alignment to the scenario in which global warming increases by no more than 1.5°C.
In order to help market participants looking to chart a path to net zero, we launched the S&P PACTTM Indices (S&P Paris-Aligned & Climate Transition Indices), which are designed to meet the minimum standards for the EU Paris-aligned and EU Climate Transition Benchmarks. In addition to lowering carbon emissions relative to their underlying benchmarks, the indices also seek to decarbonize on an absolute basis at a rate of 7% year over year. According to the Intergovernmental Panel on Climate Change, this is the rate of decarbonization required to achieve net-zero emissions by 2050 and limit global warming to 1.5°C.
Exhibit 1 demonstrates that the addition of sustainability factors does not necessarily compromise the returns for the index.
The broad layer of sustainability screens available is unlimited for those keen on this strategy. There are different sustainability versions of benchmark indices like the S&P ESG Dividend Aristocrats Index Series, S&P Global Clean Energy Index, S&P Global Water Index, Dow Jones Green Real Estate, etc.
Sustainable factors focus on addressing global issues, and investment strategies are incorporating them in a coordinated effort toward a positive change. The events of the past year have caused many businesses to consider ESG risks and opportunities and the role they play in achieving financial resilience, thereby fueling ESG adoption within the investment community.
In India, companies like Reliance Industries, HDFC Bank, Tata Consultancy, Infosys are pledging their commitment toward net zero, along with several other global companies across the globe. The country’s efforts to align with the global focus on climate change is a tall task involving reduction in coal, which is the primary source of energy and power generation. However, efforts are in progress with initiatives such as the world’s largest solar energy project to generate 175 gigawatts of renewable energy capacity by 2022 and 450 GW by 2030; tackling deforestation; regulatory ESG disclosure requirements for top companies; along with the government focus via varied projects. Even though these are small steps, they are aimed toward the net zero target.The posts on this blog are opinions, not advice. Please read our Disclaimers.