STOXX, the operator of Deutsche Boerse’s index business, has launched two new low carbon indices, the STOXX Climate Impact Index and the STOXX Climate Awareness Index. The indices track the performance of global equities with advanced climate change strategies in place, as rated by the Carbon Disclosure Project (CDP), a not-for-profit organization focused on environmental impact reporting.

The indices overweight technology, consumer goods and telecommunications while underweighting oil & gas, industrials. and utilities.

The indices use a scoring methodology developed by CDP which evaluates companies based on their progress in the transition towards a low carbon economy. Companies are given a rating from A to D, with A being the highest rating, reserved for climate change leaders that are committed to following a company-wide strategy to help tackle climate change.

This approach may provide a better exposure to the low carbon factor by utilising forward-looking screens instead of relying on historical data, as is common in low carbon indices currently in the market.

Matteo Andreetto, chief executive officer, STOXX, commented: “These indices mark a new step in the low carbon investment, as they take into account the forward-looking data used in the CDP Scoring Methodology, focusing on companies’ climate-related financial disclosures in areas like governance, strategy, risk management, targets and opportunities. This is in line with the recommendations of the Task Force on Climate-related Financial Disclosures.”

The Climate Impact Index initially screens all companies within the STOXX Global 1800 Index to exclude coal, global compact and controversial weapons firms. Remaining constituents undergo CDP’s scoring analysis with those that achieve a CDP rating of A or B being selected for final inclusion.

The Climate Awareness Index performs a similar process but includes all companies in the parent index with a CDP rating of A, B, or C.

Constituents are weighted by market capitalisation multiplied by a company specific carbon intensity factor that seeks to overweight stocks with lower carbon usage. All constituents are subject to a 5% weight limit and the indices are reviewed quarterly.

Compared to the STOXX Global 1800, both the Climate Impact Index and the Climate Awareness Index underweight the oil & gas, consumer services, industrials, basic materials and utilities sectors while overweighting the technology, telecommunications and consumer goods sectors. In terms of geographic breakdown, both indices underweight the US and Hong Kong, and overweight Germany, the UK, France and Switzerland.

The performance Climate Impact and Climate Awareness indices are very similar to the benchmark showing that investors can hold an environmentally conscious portfolio without sacrificing returns.

Source: STOXX.

In the year to 18 January 2017, the Climate Impact Index returned 21.0% and the Climate Awareness Index returned 20.7%, compared to 21.7% recorded by the STOXX Global 1800. One possibility for the slight underperformance of the two indices was the underweighting of the oil & gas sector, which returned 72% over the same time period due to a rebound in the oil price.

STOXX also already offer a range of climate change and ESG focused indices, including the STOXX Global Climate Leaders Index, which only includes stocks that achieve the highest CDP rating.