A green lifestyle is not limited to consumption, it extends into investments, motivating corporations to take environmental protection seriously and reducing their carbon emissions. A German index provider from Frankfurt, Solactive, partnered with South Pole Group at the beginning of this year and brought a range of Low-carbon Equity Indexes to the market, covering the Eurozone and American market, offering a new way to combat climate change to investors, while making a profit at the same time.
The index comprises 80 low-carbon stocks
Solactive's Index Manager Henning Kahre states: “Before we published the low-carbon index, we had already 10 years of modelling and testing experience, and each year, South Pole Group uses annual reports of corporations to compile emission data, and based on the market capitalization, Solactive reasseses the composition of the index every quarter."
Taking the US as an example, there are approximately 3000 US stocks, which Solactive puts through two rounds of selection: first, companies surpassing a certain emission threshold are excluded, with different standards for different industry sectors; second, we remove companies that have no risk hedging against climate change, or now mitigation strategy in place. After these two rounds of elimination, we're left with about 200 titles, from which we select the 50% emitting less than their peers, and then weight them according to their market capitalization. If there are major market movements, we may also adjust the composition of the index. Additionally, there is a smart beta version of this index, with a high-return, low-volatility strategy, with 50 maximum-return stocks, and 30 stocks with the lowest volatility.
South Pole Group's partner for the financial sector, Dr. Maximilian Horster is of the opinion that investors need to include climate change into their risk management. He states that investors can influence the attitude of companies towards climate change. Even though the low-carbon index has now been launched, and already stood the test of time, they are now looking for partners using these indexes to structure index funds or ETFs, in order to increase the mass appeal of these products.
Chinese companies often obscure their emission data
Horster is very direct: compared to European companies, Asian companies very rarely provide emission data in their annual reporting. Only a very small number of Chinese companies disclose their data, but if they want to export their products to Europe, they will finally have to join the CDP and disclose their emission data. “I'll give you a simple number to illustrate: there is only one company in the DAX that doesn't disclose its data, and only five companies in the Dow Jones." Based on this, the low-carbon index still has difficulties tracking Asian markets, but Solactive is confident that more and more Asian companies start disclosing their emission data.
Horster goes on: “In recent years, investor's awareness for climate change risks increased gradually, including Asian investors. If all nations fulfill the commitments they made in the Paris Agreement, then the world economy will undergo a huge transformation, which will bring with it many opportunities for investors. Pressure from investors will lead to companies taking climate change seriously, starting to assess the impact of climate change as early as possible, and reducing related investment risks."