December 16, 2024

Helping meet climate goals through bond index design

The FTSE TPI Fixed Income Index Series

As the transition to the low-carbon economy gains urgency, we need more tools to assess companies’ preparedness for the climate transition and their progress in meeting climate goals. This is becoming an important element in investors’ decision-making and engagement activities.

Increasingly, those investors wish to integrate climate considerations into their investment strategies and their implementation decisions are also increasing in sophistication. FTSE Russell has addressed these trends through a variety of data and analytical partnerships, index designs and launches.

In this paper we show how one of those data and analytical partnerships—with the Transition Pathway Initiative (TPI)—has supported the development of two new fixed income index series, the FTSE Fixed Income Corporate TPI Focused Glidepath Index Series and the FTSE Fixed Income TPI Climate Transition Index Series.

Key takeaways:

FTSE Fixed Income TPI indices meet the diverse needs of fixed income investors seeking more sustainable investment solutions
The indices are built using forward-looking metrics on companies’ alignment with the climate transition
We offer two index types: one taking a more gradual, “glidepath” approach to the reduction of greenhouse gases and the other seeking a more immediate decarbonisation effect

Points of differentiation:

FTSE Fixed Income TPI indices are built using publicly available information
The indices serve a variety of purposes, including investor engagement with debt issuers
The index series caters for those wishing to implement a more gradual decarbonisation approach and those wishing to achieve a more immediate effect

What does our research mean for investors?

Investors reading this paper will gain a better understanding of the design principles of the FTSE Fixed Income TPI indices, their purposes and the practical implementation of a decarbonisation approach in a fixed income benchmark.

The Transition Pathway Initiative (TPI) assesses companies’ preparedness for the transition to a low-carbon economy. FTSE Russell is the data partner of the TPI and the Grantham Research Institute on Climate Change and the Environment (based at the London School of Economics and Political Science) is the academic partner of the TPI.

The TPI was created in 2017 as a joint initiative of the National Investing Bodies of the Church of England and the Environment Agency Pension Fund. The TPI is now a global effort, led by asset owners and supported by asset managers, representing around $60 trillion in assets under management or advisement worldwide (as of March 2024).

One of the TPI’s missions is to assess the progress of corporations on the transition to a low-carbon economy. The TPI also publishes separate climate assessments for corporate bond issuers, banks and sovereigns. The TPI’s research is based on publicly available information and its assessments are free for all to use. Among those making use of TPI research and data are investors as they aim to mitigate their portfolios’ climate transition risks.

FTSE Russell co-produces the TPI Management Quality data and has created a growing range of indices incorporating a combination of data inputs from the TPI and in-house climate data sets, covering both the equity and fixed income asset classes.
FTSE Russell has launched two TPI fixed income index series, which target a decarbonisation outcome in different but complementary ways.

The FTSE Fixed Income Corporate TPI Focused Glidepath Index Series has been developed to serve as a benchmark for investors wishing to implement a low-turnover, low-tracking error decarbonisation investment strategy.

The index series methodology supports engagement with fixed income issuers rather than immediate divestment from climate laggards, generating a steady reduction in carbon emissions and intensity over time by comparison with a market-weighted corporate bond index.

The FTSE Fixed Income TPI Climate Transition Index Series uses the full FTSE Russell Sustainable Investment dataset—carbon emissions, green revenues, green bonds and TPI data—to set index weightings.

Compared to the FTSE Fixed Income Corporate TPI Focused Glidepath Index Series, the FTSE Fixed Income TPI Climate Transition Index Series targets a higher immediate TPI and green revenues uplift and lower greenhouse gas emissions.

As a result of its more ambitious short-term sustainable investment goals, the FTSE Fixed Income TPI Climate Transition Index Series incurs higher internal index turnover and generates higher tracking error compared to the starting index universe.