September 22, 2022

Decarbonization in equity benchmarks: Smoke still rising

Faced with growing climate risk, investors are increasingly focused on tracking and reducing their portfolio’s carbon emissions exposure in global equities. There are practical and methodological challenges in tracking these reduction targets, and a consensus has yet to develop around the best metrics and measures to assess portfolio carbon exposure. All measures proposed have their own unique strengths and weaknesses, which drive volatility in results and can confound portfolio-level trends, strengthening the case for utilizing multiple metrics.

Against this backdrop, this research paper – the first in an annual series created in partnership with the UN-convened Net-Zero Asset Owners Alliance – analyses trends in the carbon exposure for the FTSE All-World Index, a global benchmark of over 4000 companies capturing large and mid-cap companies in developed and emerging markets.

Our analysis for the FTSE All-World Index between 2014 and 2020, highlights the following key findings:

  • Absolute emissions in public equities increased in this period, driven partially by an expanding investment universe. Adjusting for constituent changes in the underlying universe, emissions reductions are evident beginning in 2019, with over half of constituents seeing year-on-year declines in emissions
  • This reduction can also be seen in carbon intensity trends: between 2014 and 2020, global equity portfolios saw a modest decline in both Weighted Average Carbon Intensity (WACI) and Carbon Footprint
  • Emissions reductions can particularly be observed in Utilities, where material declines in absolute emissions and emissions intensity have contributed to portfolio level emissions reductions in the FTSE All-World
  • Technology was the only sector to materially increase its contribution to WACI, due to emissions increases in constituent firms and consistent growth in index weight[1]
  • Removal of index constituents in the Energy Industry was a significant contributor to portfolio intensity reductions

[1] As represented in the FTSE All-World Index, 9 out of 11 ICB industries have shrunk between 2017 and 2020 while the weight of Technology has almost doubled.