July 03, 2024

Helping meet climate goals through index design

The FTSE TPI Climate Transition Index Series

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Authors
Overview
Topics
Research and Insights

Solange Le Jeune

Head of Equity Sustainable Investment Product

Hilary Norris

Product Manager, Sustainable Investment

 Key takeaways:

As the low-carbon transition progresses, financial institutions are seeking tools to assess companies’ preparedness for it, and their progress in meeting climate goals. This is becoming an important element in investors’ decision-making and engagement activities.

In this paper we examine the FTSE Transition Pathway Initiative (TPI) climate transition framework and its application, particularly in the FTSE TPI Climate Transition Index Series. The series reweights constituents based on the risks and opportunities associated with the transition to a low-carbon economy, and demonstrates how purpose-built indices, driven by the right data, can bring much needed clarity to climate-related investment and engagement alike.

Points of differentiation:

FTSE Russell – an LSEG business – is the data partner of the TPI. Led by asset owners, supported by asset managers, and backed by the expertise of the Grantham Research Institute on Climate Change and the Environment, the TPI is able to provide actionable climate insights
Using these insights, FTSE Russell develops forward-looking benchmarking and investment tools for investors wishing to manage the risks of the low-carbon transition
Alongside investment decision-making, TPI data can help investors take a targeted approach to portfolio engagement, identifying the most relevant climate issues to address

What does this mean for investors

As the climate transition progresses, investors will increasingly need to adapt their portfolios to factor in climate-change-related risks and opportunities. Going beyond static and retrospective sustainability indicators, investors now need access to robust, forward-looking data to inform their investment decisions. The FTSE TPI climate framework has been designed to provide exactly this kind of nuanced, forward-looking intelligence.

The Transition Pathway Initiative (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, an LSEG business, is the data partner of the TPI; 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 this collaborative initiative.

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. For example, the FTSE TPI Climate Transition Index Series reweights several global and diversified, regional or sectoral universes based on five key climate parameters, including companies’ TPI scores.
The FTSE TPI Climate Transition Index Series is designed to reflect the performance of diversified indices where constituents' weights vary to account for risks and opportunities associated with a low-carbon economy. It offers investors a solution to support their climate-transition portfolio ambitions and commitments, combining FTSE Russell’s expertise in climate data and index design with TPI analysis of how the world’s largest and most carbon-intensive public companies are managing their climate transitions.

Index constituent weights are adjusted using five parameters simultaneously: companies’ fossil fuel reserves, their greenhouse gas emissions, their exposure to green revenues, their TPI management quality scores and their TPI carbon performance scores.

Research