Insights

Decarbonizing Portfolios with SPDR® MSCI Climate Paris Aligned ETFs

SPDR’s Climate Paris Aligned equity ETFs track leading MSCI indices and are designed to allow investors to meet their climate objectives now and into the future by decarbonizing their portfolios swiftly, effectively and cost-efficiently.


Climate: Pressure Is Mounting

The political will to act on climate is increasing. In 2021, the UN Climate Change Conference in Glasgow (COP26) reaffirmed the 2016 Paris Agreement goal to limit the increase in the global average temperature to well below 2°C above pre-industrial levels and pursue efforts to limit it to 1.5 °C. COP26 also pledged to further cut CO2 emissions among other climate-friendly actions.

Despite this progress, listed companies are putting carbon into the atmosphere at a rate that threatens to make the world 3°C warmer — double the warming for the worst effects of climate change.1

Yet, a confluence of factors continues to put pressure on companies to address climate, driving change across the investment landscape, including:

Regulation and Policy: The Paris Climate Agreement may be the catalyst for governments to speed up climate-aligned policies. The 196 countries that signed the treaty to cut carbon emissions are legally obliged to pursue regulations to help meet their responsibilities.

Increasing Climate Consciousness: Investors who are seeking to mitigate climate risk and to invest in climate solutions may drive demand for more ESG education, guidance, solutions and analytics.

Stakeholder Pressure: Corporate boards, employees, customers and investors are using their voice, vote and dollars to compel companies and organizations to address climate risks and opportunities. For example, activist investors have secured seats on Exxon Mobil’s Board.2

Global Pledges: Asset owners, asset managers and investor initiatives are aligning efforts to take action on addressing climate change, including:

  • Net Zero Pledge: Asset owners and managers pledge to support efforts to limit global warming to 1.5°C by 2050 by targeting net zero emissions across their holdings.
  • Climate Action 100+: An investor initiative to ensure the world’s largest corporate greenhouse gas (GHG) emitters take necessary action on climate change.

Time for Investors to Act

Investors have an opportunity to play a role in the reduction in global warming through decarbonization of their portfolios. Underscoring the momentum toward broad adoption of climate investing, in our recent investment survey, 61% of North American investors said that they would implement decarbonization targets within three years.3

Climate ETFs provide an efficient vehicle for investors who are looking to take action.

MSCI, a leader in climate data — and the provider of the indices tracked by our new climate ETFs — may help investors meet their decarbonization goals with confidence.

Partnering with MSCI for a Swift and Efficient Solution

MSCI has been a pioneer in carbon and climate change analysis since 1990. The company is a leader in climate data and analytics and an acknowledged authority in climate indices (#1 Climate Index Provider by Equity Assets Linked to its Climate Indexes).4

MSCI Climate Paris Aligned Indices are designed as alternatives to familiar, broad equity benchmarks. This is designed to enable clients to decarbonize their portfolios quickly and cost-effectively without the need for extensive research and portfolio analysis.

MSCI Climate Paris Aligned Indices

Paris Aligned Benchmarks (PABs) were first introduced in 2019 as tools to accompany the transition to a low carbon economy by the Technical Expert Group of the European Commission. These indices are intended to help reallocate capital toward a low carbon and climate resilient global economy.

PABs require a 50% reduction in greenhouse gas (GHG) emissions compared with a parent index in year one, then a 7% year-on-year reduction of GHG emissions relative to the fund itself.

MSCI’s Climate Paris Aligned Indices are designed to meet and exceed the EU Paris Aligned benchmark requirements, seeking to decarbonize at an annual rate of 10% to ensure a temperature aligned with 1.5°C (“self-decarbonization”).

The indices have a number of exclusions, including:

  • PAB activity exclusions which include companies with certain involvement, based on levels of production or revenue:
    • Thermal coal mining
    • Oil and gas related activities
    • Power generation from thermal coal, oil, natural gas
    • Tobacco
  • Controversial weapons companies with certain involvement based on levels of production, revenue or ownership
  • Societal norms and environmental controversy violators

The indices employ an optimization process that seeks to improve the climate profile of their respective parent indices by minimizing exposure to the physical and transition risks of climate change, increasing exposure to sustainable (or green) investment opportunities and aligning to 1.5°C — while maintaining a modest tracking error relative to the parent index and offering low turnover.

The four climate objectives — transition risk, 1.5 °C alignment, green opportunity, and physical risk — are explained below.

The four climate objectives — transition risk, 1.5 °C alignment, green opportunity, and physical risk.

The information contained above is for illustrative purposes only.

The indices are rebalanced following semi-annual reviews in May and November each year, at which point they must adhere to 50% reduction in carbon emissions and continued decarbonization.

The indices are aligned with TCFD (Task Force on Climate-Related Financial Disclosures) recommendations, with a substantially reduced carbon footprint (including Scope 3 product and supply-chain emissions). The weights of companies with substantiated reduction targets are elevated and there is a reduction on physical climate risk exposure (based on the MSCI Climate Value-at-Risk model).

Why SPDR for Climate?

SPDR ETFs are sponsored by State Street Global Advisors, the asset management arm of State Street, a structure affording us a heritage of sustainability and significant resource to respond to client needs. Across our leading investment servicing, management, research and analytics capabilities, State Street is committed to helping investors understand the Environmental, Social and Governance (ESG) issues that affect the value of their portfolios. We further show our commitment to sustainability as a signatory to the UN’s Sustainable Development Goals, through global environmental goals and incorporation of ESG into the board charter at the corporate level.

As we witness the structural shift in our economies from tangible to intangible value drivers, we recognize that ESG considerations are becoming more important factors for companies and the way they are valued as well as for investors. At State Street Global Advisors, we are committed to combining our financial data and analytics capabilities with our investment practitioner perspective to create a new generation of ESG solutions. We provide leading research, analytics and advisory for investors’ ESG needs across asset classes and investment styles.

We believe our asset stewardship activities and ESG scoring model are differentiating activities in the financial world. As a firm, State Street Global Advisors looks to lead by example and has signed up to reduce carbon emissions — this includes joining the Net Zero Asset Managers Initiative in April 2021 to ensure our portfolios reach net-zero greenhouse gas emissions by 2050 or sooner and set interim targets for 2030.

State Street Global Advisors also has a long history of active asset stewardship and, since 2014, a key focus has been climate change. In 2022, our main board engagement focus is to support the acceleration of the systemic transformations underway in climate change and the diversity of boards and workforces.5 For SPDR, this means that we are not just an indexed investment provider, but that we actively engage with the companies held in our funds to use our voting rights as a lever to effect positive change.


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