What Drives The S&P PACT Indices’ Weights?

In April 2020, we launched the S&P PACTTM Indices (S&P Paris-Aligned & Climate Transition Indices). The indices aim to align with the following: a 1.5oC climate scenario, the relevant aspects of the EU Low Carbon Benchmark regulation (BMR), and recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) while maintaining a broad, diversified exposure. The S&P PACT Indices consist of the S&P Paris-Aligned (PA) Climate Indices and S&P Climate Transition (CT) Indices.

In this blog, we try to answer a simple question: what drives the S&P PACT Indices’ weights?

First, companies are excluded (exclusion effect) due to business activities, public controversies1, and a low alignment score with the principals of the UN Global Compact—these companies receive zero weight.

Second, companies that remain are reweighted (reweighting effect) to achieve climate-related objectives.2 Companies that perform well from a climate perspective receive an overweight, while those that perform poorly receive an underweight or zero weight, as shown in Exhibit 1.

The S&P CT Indices (i.e., the indices that align with the EU’s minimum standards for EU Climate Transition Benchmarks) have fewer exclusions than their PA counterparts (i.e., the indices that align with the EU’s minimum standards for EU Paris-Aligned Benchmarks), with fossil fuel-based exclusions being the difference. Oil operations are particularly impactful in excluding companies. The additional exclusions are evident in the excluded columns in Exhibit 2, where the S&P PA Indices show more of their market cap is excluded.

When reweighting eligible companies to meet the climate objectives, we observe (see Exhibit 3) company performance on four climate metrics to have the largest and most significant impact on the change of company weights, across regions:

  • S&P DJI Environmental Score;
  • 5oC alignment via the transition pathway dataset;
  • Physical risk score; and
  • High climate impact revenues.
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