As investors look to build climate-aware portfolios and consider how best to meet Net Zero1 objectives, we in State Street Global Advisors’ Active Quantitative Equity (AQE) team believe it is important that investors pay particular attention to their emerging markets equity allocation. The makeup of emerging markets equities brings key challenges and opportunities when considering a Net Zero, or climate-aware, approach.
The first consideration is the market construct of emerging versus developed countries. Carbon dioxide emissions are typically concentrated in three of the 10 sectors under the GICS classification system: Energy, Materials, and Utilities.
These three sectors currently make up 15% of the market cap of emerging markets (EM), and make up only 11% of the market cap of developed markets (DM).2 Though this difference may not seem extreme, because 81% of EM emissions come from these three sectors,3 the higher weighting is meaningful.
1. Net Zero refers to a state in which the greenhouse gases going into the atmosphere are balanced by removal out of the atmosphere. It is international scientific consensus that, in order to prevent the worst climate damages, global net human-caused emissions of carbon dioxide (CO2 ) need to fall by about 45 percent from 2010 levels by 2030, reaching net zero around 2050.
2 Source: State Street Global Advisors, MSCI, GICS, as at 30 June 2021.
3.Source: State Street Global Advisors, TruCost, as at 30 June 2021.