Climate Data Nuances in Equity Index Portfolios
We dive deeper and look at the unique data characteristics of climate data that need to be considered prior to implementation of climate objectives in equity index portfolios. Climate data is highly skewed and concentrated in a small number of names.
Evaluating Climate Transition Strategies
To better understand the climate transition strategies playing out in the FGC investment universe, Climate Transition Scores have been created to help identify the companies, and sectors, that are best placed to manage the risks ahead and best able to capture related opportunities. As long-term investors, the Fundamental Growth and Core Equity (FGC) team recognizes the potential threat of climate change to our investments.
Tree Climate Transition Stock Stories
The Fundamental Growth and Core Equity (FGC) team’s research process incorporates a comprehensive analysis of companies’ ESG and climate-transition credentials. We identify high-quality companies that will be well positioned to act as enablers of other firms’ transitions, realizing opportunities in areas such as carbon emission reduction, green finance, and green energy. This piece profiles three such companies.
The Voting and Guidance Library
We are committed to using our voice and our vote to enhance the long-term sustainability of our portfolio companies. As part of our ongoing efforts to bring greater transparency of our stewardship activities to our clients, portfolio companies and other stakeholders, State Street Global Advisors started publishing Voting Bulletins for select meetings. The bulletins include our votes on key resolutions and supporting rationale.
Reporting on Progress Toward Net Zero Targets
We have completed our inaugural Task Force on Climate-related Financial Disclosures (TCFD) report. This document provides in-depth information around our governance approach, strategy, risk management, and climate-related targets and will be published yearly.
An Integrated Approach to ESG and Quality
ESG factors are key considerations in evaluating a company’s quality and sustainable growth prospects. State Street’s Fundamental Growth and Core Equity (FGC) team incorporates ESG considerations, including climate transition planning and climate risk, into its fundamental analysis of companies via the team’s proprietary Confidence Quotient metric.
Our Journey to Net Zero
Climate change is a complex issue, and reaching net zero requires tremendous efforts and decisive actions from both the private and public sectors, including sound regulations and fiscal policies, technology innovation, and capital reallocation. We do our part by focusing on our fiduciary duty, the clients we serve, and the companies in which we invest.
Stewardship Asset Report 2021
Report Asset Stewardship 2021 year in review showcases the engagement and voting activity we undertook in our mission to build sustainable capital markets and maximize value for our clients.
Net Zero: An Investor’s Implementation Guide
Recent years have seen various investor and regulatory bodies propose investment frameworks to reach net zero. The main options for investors with respect to their portfolio holdings are engagement with company boards and management, selective divestment, enhancing the carbon profile of portfolios via the integration of climate considerations and improved reporting. Most net zero frameworks will pull on these levers to varying extents. In this article, we discuss these levers and how we can help with the implementation of portfolio net zero objectives.
Our Target: Net Zero
We have set targets for our in-scope assets, using the IIGCC Paris Aligned Investment Initiative’s Net Zero Investment Framework as our base starting point. Given our business model, our aggregate portfolio broadly reflects the market, and our perspective is that of a universal owner of assets. This means that real-economy carbon emissions reductions, across all sectors and all regions, are critical for our ability to meet our Net Zero goals by 2050. Our strategy for increasing the proportion of assets to be managed in line with net zero is tailored to the key levers we have to further the transition to a low- carbon economy. We have already begun our journey.
Your Target: Net Zero
On 20 April, we submitted our interim net zero targets for 2030 to the Net Zero Asset Manager initiative. We have set the following three targets for our in-scope assets, based on the IIGCC Paris Aligned Investment Initiative’s Net Zero:
– Portfolio coverage – increase AUM invested in assets in material sectors (carbon-intensive sectors) that are (i) achieving net zero or (ii) aligned to net-zero to 100% by 2040, starting from $582.7 billion or 14.1% of our total AUM today.
– Engagement – ensure that 70% of financed emissions are net zero, aligned with a net-zero pathway, or the subject of direct or collective engagement and stewardship actions and increase this ratio to at least 90% by 2030.-
– Emission reduction – reduce financed Scope 1+2 carbon emissions intensity 50% by 2030 relative to the 2019 baseline at a portfolio level.
Net Zero Target – Setting Methodologies Demystified
Investors are thinking through their strategies to support achieving net zero by 2050. We’d like to share some of our own research to help guide investors. There are three main methodologies available in the market. While all three frameworks focus on setting Paris aligned targets for financial institutions, there are some similarities and differences among the three frameworks:
- Institutional Investors Group on Climate Change (IIGCC) Paris Aligned Investment Initiative (PAII)
- Science Based Targets Initiative (SBTi) for Financial Institutions
- United Nations-convened Net Zero Asset Owner Alliance (NZAOA) target setting protocol
Fixed Income ESG: Combining Performance & Responsible Investing
ESG is increasingly at the top of many institutional investors’ agendas today and the focus is no longer solely on equity. Whether driven by regulation or the momentum of Net Zero, investors are putting much more thought into how to successfully
embed ESG into their fixed income investments. We outline the approaches investors can take to integrate ESG into their fixed income investments.
ESG Implications of the Russia-Ukraine War
State Street Global Advisors is closely watching events and markets as we seek to guide our clients through the investment challenges presented by the Russia-Ukraine crisis. In this commentary, we’ll provide our current views in response to some of the most urgent questions we’ve received related to environmental, social, and governance (ESG) issues.
State Street Global Advisors Suspends the Purchase of Russian Securities
State Street Global Advisors has suspended the purchase of Russian securities in all portfolios for the foreseeable future.
Our overall exposure to Russian securities is less than 0.01% of our total assets under management,* which are primarily invested in portfolios tracking various equity and fixed income indices. We have been actively engaging with index providers to push for the removal of Russian securities from their indices, which many have announced will commence next week.
We will continue to manage portfolios in alignment with client objectives, and we are carefully considering ongoing market, regulatory and fiduciary duties as we navigate this evolving situation.
The Most Urgent Investment Questions Emerging from the Russia/Ukraine Conflict
As the Russia/Ukraine conflict continues to unfold, the grave human toll is our foremost concern. As investors, we are watching events and markets closely as we work to guide our clients through the investment challenges presented by this crisis. In this commentary, we’ll provide our current views on some of the most urgent questions we’re receiving from clients today.
An Update on our Perspectives on the Russia/Ukraine Conflict
Three key points on the current environment and implications for investors. Elliot Hentov shares our current perspectives on the Russia/Ukraine conflict.
Understanding Paris-Aligned Indexes
As investors progress on their journeys to net zero and decarbonization in general, Paris-Aligned Benchmarks (PABs) are becoming more critical to investors everywhere.
We outline some of the differentiators between PABs and the Climate Transition Benchmarks (CTBs) which are being developed by index providers to align with the EU Technical Expert Group guidelines. We then examine in more depth some of the differences between two key PAB indexes: those from MSCI and Solactive.
5 Key Trends in Indexing
In the past dozen years, the indexed investment management industry has survived two great stress tests — the financial crisis of 2008 and the pandemic of 2020. It has emerged not merely unscathed but strengthened.
Keeping Pace with the Climate Transition
The transition to a low-carbon economy could occur faster than investors may think.
Climate change has already become one of the most prominent line items on the world’s agenda. But we believe that its impact on the global macroeconomy is just beginning and increasing in pace. In our view, investors should think of the transition to a low-carbon economy as a multi-dimensional shock event, spread out over time, that will have major regulatory and economic consequences and profound investment implications. Investors who think the pace of climate-related change in markets/economies will be slow could be in for a major surprise.
ESG, Climate Metrics and Value Investing
Value indices could present a significant negative bias with regard to ESG and carbon securities relative to their Growth counterparts. Energy and Utilities that rank poorly with respect to carbon emissions tend to be overweight in such indices and Information Technology, Consumer Discretionary and Communication Services that rank highly from an ESG perspective tend to be underweight.
Similarly, when Value and Growth indices are compared using different climate metrics, the profile of Value indices looks a lot worse than that of Growth, with higher carbon emissions and brown revenues and lower green revenues.
Nevertheless, investors could dramatically improve the ESG profile of their Value portfolios by optimizing them to align with multiple objectives, including preserving exposure to the Value factor whilst improving the ESG and climate profile of their portfolios.
Download the PDF
Outcomes and Opportunities
- COP26 resulted in a number of developments that will impact the financial services industry.
- A new standards body was established, which will help achieve a longdesired global ESG reporting standard.
- Other major developments were made in areas of biodiversity, phasing out of coal, new restrictions on methane, carbon markets preparation and a focus on nurturing green technology innovation.
The World Targets Change
How Investors’ Global Focus on Carbon is Set to Alter the Game
Our latest ESG research reveals an industry poised for a global groundswell of decarbonization target-setting over the next three years. Asset owners say their climate strategies are about creating real change and driving the economic transition, potentially transforming the investment landscape.
COP26, the 26th annual UN conference on climate change, is here and expectations are high. In this article, our ESG team explains more about the summit, what might happen there and how this may well impact investors everywhere.
Spiralling Disruption: The Feedback Loops of the Energy Transition
We are at a tipping point. Positive feedback loops underpinned by innovation will likely lead to a mass displacement of fossil fuels by renewables. In this article, we identify seven feedback loops that are driving a rapid transformation of the global energy system.
Peak fossil fuel demand likely occurred in 2019. This marks the tipping point where positive feedback loops start to dominate the system. We identify seven virtuous and vicious feedback loops.
Journey to Net Zero
Multiple frameworks exist to help asset owners and managers reach net zero, providing guidelines on decarbonizing portfolios, increasing investments in climate solutions and green technologies, and improving reporting.
State Street Global Advisors’ thinking on this topic is organized into six areas. For example, Asset Class Alignment shifts investments to appropriate net zero pathways within each asset class. For asset owners, the most important step is likely to be portfolio construction and we offer some approaches to consider.
A Case For: An Active Fundamental Approach to Climate Transition
A determined effort by both the public and private sectors to bring about a significant reduction in greenhouse gas emissions in the decade to 2030 also offers the potential for significant capital growth in equities. This new era of climate transition, when paired with discerning and forward-looking equity investment, presents opportunities for generating significant alpha.
Net Zero and the Enhanced Approach to EM Equities
The Effect of Adding a Climate Objective on Risk and Return
- We sought to determine whether investors can address their Net Zero objectives without sacrificing the risk and return characteristics of an Enhanced, or low-risk active, approach in emerging markets equities.
- By utilising the natural active risk within the Enhanced framework, we were able to integrate climate objectives with only a marginal change in the overall tracking error relative to the benchmark
Fundamental Active Equities: New Drivers & New Approaches for Climate-Related Investing
- As COP26 approaches, a series of regulatory and economic drivers are emerging which have the potential to dramatically reshape equity investing.
- Climate transition planning and competency will become key areas of differentiation for companies.
- We see promising opportunities in both Climate Transition and Climate Opportunity Strategies.
Engage or Divest? The Question at the Heart of Climate Impact
Climate change is a systemic threat to the global economy and represents both a strategic and operational challenge for all companies. As awareness of the systemic impact of climate change has grown, there has been progress on many fronts.
Countries have committed to reducing carbon emissions in line with the 2015 Paris Agreement of limiting global warming to well under 2°C by the end of the 21st century. In addition, many countries and local jurisdictions, led by the European Union, are implementing carbon pricing and emissions trading initiatives in order to reach net zero carbon emissions by 2050.
We have seen a sustained shift in energy use, away from fossil fuels and towards renewable energy, driven by acknowledgement of the impact of fossil fuel pollution, the need to reduce carbon emissions, and the growing affordability and practicality of renewables.
Energy Transition a Major Regime Shift for Global Economy
- As the world weans itself off fossil fuels, the terms of trade will change, with profound implications for exchange rates and sovereign borrowing costs globally.
- The energy transition will likely prove to be a structural headwind to US dollar’s dominance.
- Future global imbalances will accrue to countries at the technological forefront.
Reimagining Macroeconomics to Meet Climate Challenge
- Climate change can no longer be relegated to specialty models but must be integral to the mainstream macroeconomics framework.
- This means ESG investing would now be deemed as the necessary new framework for both macroeconomics and investing.
- Similarly, macroeconomic policies should seek to address costing disparities associated with new measures of productivity growth that take into account various aspects of climate change.
Journey to Net Zero
In this article, we examine the main net zero frameworks, their common threads and what they mean in practical terms for investors. In particular, we outline the concrete steps that investors need to take to make their portfolios “net zero aligned”.
Climate Data Nuances in Equity Index Portfolios
In our recent paper, “Weathering the Storm: Exploring Climate Strategies”, we explored the main approaches to integrating climate considerations in investment portfolios. In this article, we dive deeper and look at some nuances in climate data that need to be considered prior to implementation of climate objectives in equity index portfolios.
Weathering the Storm: Exploring Climate Strategies
Climate change is here and we will experience its impacts for decades to come. How should investors react in an environment where climate risks will only heighten and regulations will only become more onerous?
ESG Data: Addressing the Challenges
Accurate and consistent data is essential to any robust investment strategy or approach and environmental, social, and governance (ESG) investing is no exception. Yet, much has been made of the challenges of ESG data, which has — according to some studies — hindered adoption of ESG and climate investing. In this piece, we outline how ESG ratings can differ between providers and why investors need to be aware of the implications of choosing a particular ESG data provider.
A Kernel of Caution in a Robust Recovery
Since we issued our last Global Market Outlook in December, vaccination rollouts and robust monetary and fiscal support have accelerated the pace of economic recovery. COVID-related challenges remain acute in many areas, but the situation is improving, even in hard-hit emerging markets. As the US economy surges, European growth is poised to accelerate; emerging markets will soon follow. It appears that US market leadership may soon give way to international markets.
A Case For: Sustainable Climate Bond Strategy
State Street Global Advisors has developed a breakthrough climate bond strategy. Our climate-aware investment process enables you to immediately improve your portfolio’s carbon profile and reduce climate risk, while maintaining target returns.
Green Bonds: Mitigate Climate Risks, Capture Investment Opportunities and Fund the Transition
Would you like to make a positive impact through your investments? We argue that investors in listed securities who want to encourage more sustainable corporate behaviour should invest in green bonds.
Have We Seen the End of Fossil Fuel Expansion?
The International Energy Agency (IEA) has just released a report on the need for radical change in the energy sector and beyond to reach net zero emissions by 2050.
In this Q&A, Carlo M. Funk, Head of EMEA ESG Investment Strategy, discusses the report’s key findings and the implications for investors.
2020 Asset Stewardship Report
Our 2020 report showcases the engagement and voting activity we undertook in our mission to build sustainable capital markets and maximize value for our clients.
ESG, Tracking Error and Long-Term Performance
The market is replete with studies that research the relationship of ESG integration and performance. Tracking error is often discussed in conjunction with performance and the issue of tracking error against a strategic benchmark arises in most client conversations around ESG integration.
In our 2021 ESG outlook, we highlighted that investors tracking an underlying benchmark often have strict limits on tracking error embedded in their investment processes.
Yet, deviations from standard benchmarks become inevitable when ESG considerations are included in index methodologies. Also, with rising ESG adoption and the notion of ESG becoming “The New Normal” it is not inconceivable that ESG considerations will make their way into standard benchmarks.
So how should investors evaluate tracking error in light of internal and external pressure for more ESG integration?
Fundamental Active Equities: Climate Debate and Carbon Pricing
COP26, scheduled to be held from 1 to 12 November 2021, is expected to set the direction on whether ‘hard’ metrics, such as carbon pricing, will dominate environmental risk measures that are adopted in portfolios over the next decade.
ESG in Index Investing: Deconstructing Five Myths
Two of the most prominent investment trends of the post-global financial crisis world have been the sustained rise of both indexing and environmental, social and governance (ESG) investing. These trends have combined with many investors now seeking ESG and climate indexing strategies to achieve long-term and cost-effective sustainable returns.
Yet, many myths have arisen over the years around what sustainability-minded investors can achieve within an index approach. This piece aims to set the facts straight and clear up some misunderstandings of ESG in index investing.
Fearless Girl 4th Anniversary
Four Years Later, Her Impact Continues
On March 8th, 2021, we installed a broken glass ceiling surrounding Fearless Girl in New York to celebrate her 4th anniversary and International Women’s Day – symbolizing the many glass ceilings that women have shattered that continue to inspire all of us.
Fossil Fuels: An ESG Screening Approach
There is a growing interest among global investors in divesting, or minimizing exposure to, Fossil Fuels in their portfolios. Specifically, more than 1,200 global institutional investors, with $14.6 trillion in combined assets, have committed to divesting from fossil fuels in 2020. These investors seek to position themselves in opposition to the physical effects stemming from climate change, and seek to prepare their firms for future regulation around fossil fuels.