MSCI has introduced a new suite of fixed income indices providing exposure to corporate bonds while adhering to the Paris Agreement’s objective of limiting global warming to 1.5°C above pre-industrial levels.
MSCI has unveiled its first fixed income indices aligned with the Paris Agreement’s objectives on climate change.
The MSCI Fixed Income Climate Paris Aligned Indexes are designed to help clients minimize their exposure to transitional and physical climate risks and obtain alignment with a net-zero-carbon world.
The indices complement MSCI’s existing climate change benchmarks as well as the firm’s suite of Paris-aligned equity indices which underlie ETFs from BlackRock, UBS, and Amundi.
Methodology
The suite has been launched with an initial two indices covering investment-grade corporate bonds denominated in either US dollars or euros – they are the MSCI USD IG Climate Paris Aligned Corporate Bond Index and MSCI EUR IG Climate Paris Aligned Corporate Bond Index.
Index construction begins from starting universes consisting of bullet, callable, and putable fixed-rate corporate bonds from across the yield curve.
Companies embroiled in ESG-related controversies, involved in controversial weapons, tobacco, or thermal coal mining, or deriving significant revenue from oil and gas-related activities are removed.
The indices then use an optimization process to reweight remaining securities based on the risks and opportunities associated with the climate transition.
MSCI harnesses a diverse array of data and analytics to feed into the construction process including scope 1, 2, and 3 carbon emissions, green revenues, and the index provider’s own proprietary low carbon transition score and climate value-at-risk measures.
Each index offers an immediate 50% reduction in weighted average carbon intensity as well as a further 10% annual decarbonization going forward, immediately aligning it with EU Paris-Aligned Benchmark (EU PAB) requirements.
The indices also aim to deliver on a range of secondary objectives such as maximizing exposure to sustainable energy providers, increasing the weight of companies with clear carbon reduction targets, minimizing fossil fuel exposure, and reducing climate value-at-risk by 50%.
Additionally, the optimization process contains several constraints that aim to minimize deviations between the indices and their parent universes on metrics such as duration, credit rating, country weights, sector weights, and issuer weights.
The indices are reviewed on a monthly basis although they may not be rebalanced in a given month if the optimization process cannot find a suitable solution that satisfies key objectives and constraints.
MSCI also offers an index targeting investment-grade corporate bonds denominated in pound sterling as well as high-yield corporate indices covering all three major fiat currencies, potentially highlighting further room for expanding the Paris-aligned fixed income suite.
Investors currently looking for immediate access to Paris-aligned fixed income exposure may wish to consider ETFs from Tabula Investment Management or Amundi. The Tabula EUR IG Bond Paris-aligned Climate UCITS ETF (TABC GY) launched in January and comes with an expense ratio of 0.25%, while the Amundi iCPR Euro Corp Climate Paris Aligned PAB – UCITS ETF (PABC GY) debuted in April and costs 0.16%. Both funds are linked to Solactive indices that target investment-grade corporate bonds denominated in euros.