MSCI has launched a new suite of environmental, social, and governance (ESG) indices – the MSCI Climate Change Indexes – for investors who specifically wish to integrate low carbon and climate change considerations into their portfolios.
Remy Briand, Head of ESG at MSCI.
Remy Briand, Head of ESG at MSCI, commented, “Climate change will be felt beyond the traditional horizons of most sectors, and it is critical that the investment industry collaborates to enable the transition to a low carbon economy before climate change becomes a defining issue for financial stability.”
The indices are derived from some of MSCI’s best-known global, regional, and single-country equity benchmarks.
To create the indices, the index methodology first screens the parent index universes to remove companies involved in controversial weapons. No other companies are removed from the index.
The remaining constituents are the reweighted based on MSCI’s Low Carbon transition score which measures a company’s exposure to low carbon transition risk, carbon emissions, and fossil fuel reserves, as well as its exposure to opportunities including alternative energy and clean-technology.
The Low Carbon transition score is calculated based on two factors. The first is determined by grouping companies into one of five categories based on the predominant risks and opportunities firms in the same industry are most likely to face in the transition to a low carbon economy, while the second is an industry-agnostic evaluation of each company’s position in the transition. Reconstitution and rebalancing occur semi-annually.
According to MSCI, the methodology results in twice the exposure to clean technology companies, half the exposure to thermal coal, and four times less exposure to companies with carbon-intensive products, when compared to a parent index.
“While there are transition risks associated with taking early action, there is a growing body of evidence to show that earlier action will ultimately mean a less costly adjustment,” added Briand. “At MSCI, we continue to develop our climate change solutions using next-generation data, analysis, and tools to help with the 1.5-degree alignment, and as climate research continues to evolve, we will ensure the MSCI Climate Change Indexes reflect the latest developments.”
The indices, listed below, have multiple applications including as an underlying reference for passive index-linked products, such as ETFs, and as investment policy benchmarks to guide strategic asset allocation.
MSCI ACWI Climate Change Index
MSCI World Climate Change Index
MSCI EM Climate Change Index
MSCI Europe Climate Change Index
MSCI AC Asia Pacific Climate Change Index
MSCI USA Climate Change Index
MSCI Japan Climate Change Index