In a previous blog, we delved into the S&P Global Sustainable1 Climate Action Framework, a powerful tool designed to gauge companies’ readiness for the low-carbon transition across three key pillars: Climate Governance and Strategy, Physical Risk Adaptation Strategy, and Climate Risk Mitigation and Alignment.

In this blog, we introduce the recently launched S&P World Climate Resilience Tilted Index, which presents an innovative approach to incorporate climate-related factors within an index. The index incorporates elements of the S&P Global Sustainable1 Climate Action Framework, carbon intensity and climate solution revenue exposure indicators, aiming to increase the weight or tilt toward companies that are relatively more climate resilient, carbon efficient and have higher exposure to green revenues. It was designed to complement S&P DJI’s family of indices that integrate climate-related data by providing an index solution that factors in forward-looking climate transition considerations alongside climate risk and opportunity aspects, while remaining broadly diversified.

Introducing the S&P World Climate Resilience Tilted Index

The S&P World Climate Resilience Tilted Index is a broad-based index that aims to be industry group- and region-neutral relative to its underlying index, the S&P World Index.^[1]

The index does not seek to exclude specific sectors that are traditionally removed or underweighted from indices that focus on climate-related factors, such as Energy and Utilities. The index does, however, apply a few, common safeguarding exclusions (see Exhibit 1). Instead, the index aims to retain strong representation of sectors that have carbon-intensive companies that are nevertheless thought to be crucial to help adjust to a lower GHG emissions economy.

The index then tilts eligible companies’ weights within each tilting group^[2] based on four tilting factors, as shown in Exhibit 2. These include backward-looking climate metrics, such as Carbon Intensity^[3]; strategy-related forward-looking elements, such as two pillars of the S&P Global Sustainable1 Climate Action Framework—namely the Climate Governance and Strategy and Physical Risk Adaptation Strategy; and finally, a component that reflects climate transition opportunities, as measured by the revenue exposure to Climate Impact Solutions.

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By design, the index shows low active sector weights relative to the underlying S&P World Index. Traditionally underweighted sectors like Energy and Utilities have been preserved at similar benchmark sector weights, as the tilting is applied within the region-industry-group tilting groups, minimizing unintended sectoral biases. In other words, companies are under/overweighted only relative to their tilting group peers, resulting in a weighting scheme that is more comparable to the underlying index (see Exhibit 3).

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The low sector active weights compared to the underlying index are also reflected in the reduced observed levels of tracking error historically, which were below 100 bps for all tested time periods (see Exhibit 4). In terms of performance, the return differential between the S&P World Climate Resilience Tilted Index and the S&P World Index was reduced (see Exhibit 5).

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Based on back-tested historical data, the index achieved improvement across all tilting factors that are controlled for in the methodology, such as lower index-level weighted-average carbon intensity (WACI), lower exposure to physical risk and higher revenue exposure to companies providing solutions for climate impact (see Exhibit 6). Additionally, we see higher exposure to Transition Strategic companies and lower exposure to Transition Limited companies, which, while not controlled for explicitly, are a beneficial byproduct from the specific data inputs used in the index methodology.

The tangible impacts from climate change present a deeply complex global challenge. For investors seeking a tool to help integrate and measure climate-related considerations while maintaining broad sector diversification and leveraging forward-looking climate transition readiness signals, the S&P World Climate Resilience Tilted Index may provide an effective solution.

^[1] Please see index methodology here.

^[2] Tilting groups are defined as region-industry groups.

^[3] Please note that the index does not target a specified weighted-average carbon intensity improvement relative to the parent index.

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