Two years is a long time in the sphere of ESG. While the world wrestled with the worst pandemic in a century, S&P Dow Jones Indices (S&P DJI) shook the ESG indexing space and cemented its position as a leader in climate indices. April 20, 2022, marks the two-year anniversary of the launch of the first of the S&P PACT™ Indices (S&P Paris-Aligned & Climate Transition Indices), which aim to align with a 1.5⁰C scenario, the EU’s minimum standards for Climate Transition Benchmarks (CTBs) and Paris-aligned Benchmarks (PABs) and the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Furthermore, the S&P PACT Indices go beyond the EU’s minimum standards for CTBs and PABs by using pioneering, forward-looking carbon and physical risk data provided by S&P Global Trucost, as well as incorporating Science Based Targets (SBTi) in its approach.
Exhibit 1 shows how the index series has changed since its launch, including expansion into new regions and index construction consultations, adapting to an ever-evolving sustainable investing landscape.
All S&P PACT Indices are designed to uphold their climate-related objectives while maintaining a similar sector and industry composition to their benchmarks, minimizing active risk. These objectives have held up well, as we can see in Exhibit 2, with each S&P PACT Index having stayed broadly close to its respective benchmark in terms of risk and return.
In fact, we see that most S&P PACT Indices have outperformed their market-cap-weighted underlying benchmarks over their history. Exhibits 3 display the S&P PACT Indices’ resilience to the market downturn during the pandemic, while the recent underperformance in 2022 coincides with the price surge in Energy stocks, which tend to be underweighted or excluded from each index (see our paper Exploring S&P PACT Indices Weight Attribution for further details).
As reflected in the S&P PACT Index Methodology, one of the main requirements of the EU’s minimum standards for CTBs and PABs is the 7% year-over-year reduction in carbon intensity, a key component in staying aligned with a 1.5⁰C scenario. The use of the S&P Global Trucost Transition Pathway Model is a powerful way to help ensure each index within the S&P PACT Index Series aligns with a 1.5⁰C greenhouse gas (GHG) emission reduction pathway. The S&P Global Trucost Transition Pathway Model compares each S&P PACT Index constituent’s GHG emissions with its 1.5⁰C-aligned carbon budget, utilizing both forward- and backward-looking carbon data.
Exhibit 4 shows how S&P DJI’s sophisticated approach to the construction of the S&P PACT Indices has resulted in significantly improved carbon metrics relative to their benchmarks, going beyond the minimum standards set out by the EU PABs and CTBs.
Similarly, the S&P PACT Indices showed improvements in overall ESG performance (as measured by their S&P DJI ESG Score) relative to their market-cap-weighted benchmarks, as seen in Exhibit 5.
To conclude, despite significant uncertainty in global markets and geopolitics since their inception two years ago, the S&P PACT Indices have demonstrated their value by maintaining benchmark-like performance while meeting stringent climate objectives and aligning with a 1.5⁰C scenario. For an index focused on the long term, it doesn’t look half bad in the short term.
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1 For the latest S&P PACT Index education piece, please see here.
2 For more on the first consultation, methodology changes, further exclusions and their effects on the indices, please see here.
3 For more on the second consultation, methodology changes, country and sector neutrality and their effects on the indices, please see here.The posts on this blog are opinions, not advice. Please read our Disclaimers.