What’s Been Driving the Carbon Footprint of the MSCI Climate Action Indexes?
Key findings
- We compared the financed-emissions intensity (FEI) of the MSCI Climate Action Indexes to their parent indexes across regions over a three-year period ending Dec. 29, 2023.
- We found the MSCI Climate Action Indexes’ FEI was consistently lower compared to its parent indexes at the beginning and end of the study period at both the index and sector levels.
- With one exception, these indexes decarbonized at a faster rate, or rose at a slower rate than the corresponding parent index. In large part, this was due to the drop of issuer emissions relative to the parent indexes.
The MSCI Climate Action Indexes use a bottom-up approach for selecting companies across Global Industry Classification Standard (GICS®) sectors.[1] Companies are selected based on their transition readiness relative to their sector peers, a measure that considers emissions intensity, emissions-reduction commitments and track record, climate-risk management and green revenues, all at the company level.[2]
This blog post provides an in-depth analysis of the MSCI Climate Action Indexes' FEI[3] by isolating the effect of various decarbonization drivers,[4] such as changes in the portfolio composition, changes in issuers' emissions and changes in denominator — or enterprise value including cash (EVIC) — offering a comparative perspective against their parent indexes.
FEI comparison across the MSCI Climate Action Indexes
Across various regions and countries, the MSCI Climate Action Indexes consistently exhibited a lower FEI than their parent indexes at the beginning, Dec 31, 2020, and ending period, Dec. 29, 2023, as shown in the first exhibit. During this period, with the exception of MSCI USA Climate Action Index, the FEI of the MSCI Climate Action Indexes declined more or rose at a slower rate than that of their parent indexes as shown by the percentage of change in the exhibit.
Changes in FEI by MSCI Index
As of Dec. 29, 2023. FEI is calculated as tCO2e/USD m EVIC.
Analysis of key drivers
Next, we studied in detail the carbon-footprint attribution for the MSCI Climate Action Indexes compared to the parent index. We used the MSCI ACWI and MSCI ACWI Climate Action Indexes as examples and took a closer look at the drivers behind their FEI changes over the study period, as shown in the next exhibit.
Company-level emissions changes,[5] represented by the changes in carbon emissions shown in the exhibit, contributed to a 2% reduction in the FEI of the MSCI ACWI Climate Action Index but a 5% increase in the FEI of the MSCI ACWI Index. The net effect of adding and divesting positions in the MSCI ACWI Climate Action Index caused a 18% increase in its FEI, while changes in weight and EVIC resulted in an overall FEI reduction of 9%. The negative contribution from EVIC was expected due to the increase in equity prices over the study period.
It is important to note that the MSCI Climate Action Indexes' methodology selects stocks using security-level criteria that goes beyond carbon-emissions reduction. Companies with approved science-based targets, meaningful green revenues or those with high sector-relative climate-risk management are favored for inclusion over stocks with only low carbon-emissions intensity. This insight is crucial in understanding the layered influences that extend beyond mere company-level emissions changes.
FEI attribution of the MSCI ACWI and MSCI ACWI Climate Action Indexes
As of Dec. 29, 2023. FEI is calculated as tCO2e/USD m EVIC.
Issuer decarbonization effect
We next looked in detail at company emissions changes that more closely reflect an actual issuer's decarbonization. As the next exhibit shows, the MSCI Climate Action Indexes have a greater company-emissions reduction or a lower company-emissions increase relative to their parent indexes across regions, except for Japan.
Changes in issuer-level carbon emissions: MSCI Climate Action Indexes vs. parent indexes
As of Dec. 29, 2023.
Sector-level focus
As a final analysis, we went one step further to look at sector-level emissions for the MSCI ACWI and MSCI ACWI Climate Action Indexes. As of Dec. 29, 2023, the MSCI ACWI Climate Action Index had a lower FEI at the sector level than its parent. We also observed that the FEI for all sectors of the MSCI ACWI Climate Action Index decreased, except for consumer staples and energy.
Weighted-average FEI by GICS® sector
As of Dec 29. 2023. FEI is calculated as tCO2e/USD m EVIC.
A deeper dive for a better understanding
The MSCI Climate Action Indexes had a lower absolute FEI compared to their parent indexes at both the beginning and end of the study period. Further emissions attribution of the MSCI ACWI Climate Action Index isolated the effect of various decarbonization drivers, such as changes in the portfolio composition, changes in issuers' emissions and changes in denominator or EVIC. Rebalancing effects also played a role in the degree to which FEI changed. Combining carbon-footprint attribution while focusing on the underlying drivers can provide investors with greater insights, helping them make more informed decisions.
1 GICS is the global industry-classification standard jointly developed by MSCI and S&P Global Market Intelligence.2 For more information, please refer to “MSCI Climate Action Indexes Methodology.”3 At the index level, financed-emissions intensity is computed as 𝐹𝐸𝐼 = ∑ 𝑊𝑒𝑖𝑔ℎ𝑡𝑖 × 𝐺𝐻𝐺 𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠𝑖 / 𝐸𝑉𝐼𝐶i, where 𝑊𝑒𝑖𝑔ℎ𝑡𝑖, 𝐺𝐻𝐺 𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠𝑖 and 𝐸𝑉𝐼𝐶i are the index weight, Scope 1, 2 and 3 emissions, and EVIC, respectively, for the ith constituent in the index.4 Zoltán Nagy, Guido Giese and Xinxin Wang, “A Framework for Attributing Changes in Portfolio Carbon Footprint,” Journal of Portfolio Management: Performance Analysis 49, no. 8, August 2023.5 Ibid. This is for consistently held positions only.
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