S&P Dow Jones Indices has partnered with Korea Exchange to develop a new equity index that reflects South Korea’s efforts to transition towards a low-carbon economy through its Green New Deal initiative.
The index seeks to align with the South Korean government’s goal of making the country carbon neutral by 2050.
The S&P/KRX Carbon Efficient Capped Index provides broad exposure to Korean equities while overweighting (or underweighting) companies with lower (or higher) levels of greenhouse gas emissions relative to revenue.
The index, which is available for licensing as an underlying reference for investment products such as ETFs, aims to promote behavioural change by redistributing capital towards companies most-aligned with the initiative’s goal of achieving carbon neutrality in South Korea by 2050.
Index construction starts from the parent S&P Korea BMI, a broad representation of common stocks listed on the KOSPI and KOSDAQ markets of the Korea Exchange.
The methodology harnesses data from TruCost, a company owned by S&P Global, to assign each stock a carbon footprint based on its greenhouse gas emissions (direct and first-tier indirect) relative to revenue.
Companies that have not sufficiently disclosed their carbon emissions are removed from the index pool.
The index maintains the same Global Industry Classification Standard (GICS) industry weights as the S&P Korea BMI as of each rebalance while adjusting constituent weights within each industry to reduce the index’s total emissions-per-revenue profile.
Constituents are ranked within each of the 24 GICS industry groups by emissions-per-revenue and sorted into deciles. Constituents in the top three deciles have their weight reduced, while those in the bottom three deciles have their weight increased.
Additionally, each GICS industry is identified as either Low, Mid, or High Impact with High Impact industries displaying the widest range between their first and tenth decile average emissions-per-revenue. Constituents from High Impact industries that are undergoing a weight change will have that change multiplied by a factor of three, while constituents from Low Impact industries that are undergoing a weight change will have that change multiplied by a factor of 0.5. No single stock may account for more than 30% of the total index weight, however.
The index is reconstituted annually and rebalanced quarterly. It currently includes 483 constituents, representing 90% of the total market capitalization of the parent S&P Korea BMI.
Reid Steadman, Global Head of ESG Indices at S&P Dow Jones Indices, commented, “We are honoured to launch the S&P/KRX Carbon Efficient Capped Index with the Korea Exchange and support the growth of green investments in the country. Our carbon-efficient and ESG indices are designed to reflect the transition to more sustainable and low carbon economies globally. The index’s unique characteristics help encourage more transparency in ESG data and carbon footprints among Korean companies.”
Woo-kyeong Hwang, Index Business Head of Korea Exchange, added, “It is a great privilege to launch the S&P/KRX Carbon Efficient Capped Index jointly with S&P Dow Jones Indices, a leading index provider in the world. As the very first carbon efficient index in Korea, the index will be a big boost in global efforts to achieve carbon neutrality while helping businesses to respond to climate change.”