Decarbonisation in portfolio benchmarks: Tracking the portfolio carbon transition 

As climate investing regulations evolve globally, carbon emissions data is increasingly required for compliance, risk assessment, and investment decisions. Investors use these metrics to guide portfolio construction, security selection, and asset allocation.

However, interpreting portfolio emissions requires care. Metrics are influenced by changing emissions profiles, portfolio shifts, disclosure practices, and macroeconomic factors. These variables can make it challenging when comparing decarbonisation status across asset classes, portfolios, and time horizons.

Now in its fourth annual edition, the LSEG Decarbonisation in portfolio benchmarks report, which is developed by LSEG researchers, working with the UN-Convened Net-Zero Asset Owner Alliance (NZAOA), provides a data-driven view of carbon emissions trends across global equity and corporate fixed income benchmarks. 

Our analysis tracks emissions trends between 2016 and 2023 of listed equities (represented by the FTSE-All World Index), and investment grade corporate bonds (represented by the FTSE WorldBIG Corp Index) using widely adopted absolute emissions and emissions intensity metrics. 

• Aggregate Scope 1 and 2 emissions of global equities have yet to peak, with FTSE All-World Index emissions expanding 4% p.a. between 2016 and 2023 to reach 13 bn tonnes CO₂e. The inclusion of fast-growing, high-emitting emerging market (EM) constituents to the equity index have been a key driver of this growth.
• In corporate fixed income – where the benchmark has not seen a comparable shift to EM issuers – aggregate Scope 1 and 2 emissions have declined slowly at -1% p.a. for investment-grade bond issuers in the FTSE WorldBIG Corp Index.
• Portfolio carbon intensity has gradually declined since 2016, with the FY2023 Weighted Average Carbon Intensity (WACI) being 26% lower in equities and 20% in fixed income despite volatile macro-economic factors and sectoral rotations.
• Attribution analysis shows that year-on-year fluctuations in portfolio intensities are still mostly influenced by non-carbon factors (i.e., normalisation and allocation effects), however in certain sectors such as Utilities the changes in emissions intensity does appear to be driven by real-world corporate emission reductions.
• Emissions reporting among benchmark constituents continues to improve. Scope 1 and 2 disclosure rates reached 79% in equities and 67% in fixed income in 2023 (up from 56% and 53%, respectively in 2016), and over half of EM firms in both benchmarks now disclose operational emissions.
• Scope 3 disclosures of FTSE All World constituents reached 58% in 2023. However, volatility and quality issues in Scope 3 data persist: only one-third of firms cover the material categories in their disclosures, and about two-thirds show annual emissions changes of greater than 20%, making it challenging for investors to estimate Scope 3 portfolio emissions reliably.
• 65% of FTSE All-World constituents have set long-term climate targets, an eightfold increase since 2018, though the pace of new commitments has slowed since 2021. Firms with climate targets typically delivered more consistent Scope 1 and 2 emissions reductions than those without targets.
• Green bonds now represent ~5% of investment-grade bond universe – an eightfold growth since 2016 – making their treatment increasingly important in portfolio emissions calculations. Different treatments of green bonds in portfolio emissions calculations, including discounting and use-of-proceeds modelling, can lead to materially different results that are large enough to shift portfolio intensity.
• Broadening our coverage of the corporate bond market to include high-yield bonds for the first time, we observed that the high-yield segment has lower disclosure rates (39% vs 67%) and is more carbon intense (28% higher WACI) but has decarbonised faster than investment-grade bonds.

This report is written in partnership with the NZAOA, a member led initiative of 88 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 report underscores the importance of understanding the root cause of changes in emissions and enabling more accurate conclusions. This research is an expansion on previous years providing an analysis of green bonds and high-yield bonds, along with a deep dive into Scope 3 emissions. 

We hope this report will prove to be key resource for investors who are tracking the evolution of their decarbonisation strategies.

We used various LSEG proprietary sustainable investment data in our analysis, including climate data, fixed-income data and FTSE Russell indices.

• Decarbonisation in portfolio benchmarks: Tracking portfolio carbon transition (2024)
• Decarbonisation in equity benchmarks: Tracking the portfolio carbon transition (2023)
• Decarbonisation in equity benchmarks: smoke still rising (2022).