Portfolio emissions metrics – and the emissions’ performance of key market benchmarks – are under close scrutiny as investors place growing emphasis on monitoring their carbon exposure. Such data is increasingly required for regulatory reporting, and helps to inform decisions on investment products, asset allocation and security selection. However, calculating portfolio emissions remains technically challenging, and resulting data is often hard to interpret.
Now in its third annual edition, this report which is developed in collaboration with the UN-convened Net-Zero Asset Owner Alliance (NZAOA), tracks emissions trends in key market benchmarks across widely used absolute emissions and emissions intensity metrics.
In addition to analysis of Scope 1 and 2 carbon exposures in equity markets (represented by the FTSE All-World index), this year’s report adds a more systematic analysis of Scope 3 portfolio emissions, and, for the first time, expands our work to fixed income, by including an analysis of emissions trends in global investment grade corporate bonds (represented by the FTSE WorldBIG Corp index). We also explore newly proposed metrics, including I-PEP and duration-adjusted WACI for bond portfolios.
Key findings from the report
- Since the conclusion of the Paris Agreement, key financial benchmarks are decarbonising on an intensity basis.
- However, in absolute terms emissions - assessed in terms of ‘chained’ absolute emissions - have continued to slowly increase for equities (by 2.3% pa) and have been largely flat for fixed income (- 0.7% pa) in the same period.
- Portfolio emissions performance can be hard to track on a year-by-year basis because long-term trends are often overshadowed by short-term fluctuations.
- Our attribution analysis shows that this short-term volatility is driven by non-carbon factors – such as constituent churn, sector rotations or changes or adjustments to normalisation factors (for example EVIC).
- Investors should consider a dashboard of portfolio emissions metrics instead of any single measure as individual carbon metrics are regularly impacted by idiosyncratic biases and short-term volatility.
- The immaturity of Scope 3 data makes it challenging to consistently track value-chain emissions on a portfolio basis, but focusing on the most material Scope 3 categories for a sector can reduce volatility and improve the stability and accurate of Scope 3 data.
Points of differentiation
This paper is written in partnership with the UN-Convened Net Zero Asset Owner Alliance (NZAOA), a member led initiative of 89 institutional investors representing US $9.5 trillion in total assets[1], ‘committed to transitioning their investment portfolios to net zero GHG emissions by 2050'.
The report marries LSEG’s deep expertise in portfolio analytics and best-in-class sustainable investment IP to highlight challenges and best practices in evaluating and tracking portfolio decarbonisation over time.
The analysis systematically explains the factors that drive the changes in absolute emissions and emissions intensity metrics. In addition to the analysis of Scope 1 and 2 carbon exposures in equity markets, the report explores Scope 3 emissions within the FTSE All-World Index, through the lens of our priorietary materiality filter, and expands our work to fixed income, by including an analysis of emissions trends in global investment grade corporate debt, using the FTSE World Broad Investment-Grade (WorldBIG) Corporate Bond Index as a representative benchmark.
What does our research mean for you?
The report underscores the critical importance of understanding the root cause of changes in emissions. This research highlights how investors can more effectively measure and track portfolio decarbonisation over time, suggesting that a dashboard of metrics (instead of a single metric) is more sensible, as well as tracking trends over multiple years.
We hope this report will prove to be a crucial resource for investors who are tracking the evolution of their decarbonisation strategies.
Find the reports from the previous two years: Decarbonisation in equity benchmarks: Tracking the portfolio carbon transition (2023) and Decarbonisation in equity benchmarks: smoke still rising (2022).
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