A Visual Guide to 5 Types of Climate Indexes
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A Visual Guide to 5 Types of Climate Indexes



The following content is sponsored by MSCI.

A Visual Guide to 5 Types of Climate Indexes

If average temperatures continue to rise at their current rate:

  • 10% of the world’s economic value could be lost by 2050
  • A sea level rise of over 8 feet could flood coastal cities
  • 420 million people could be exposed to extreme heat waves

To prevent the worst effects of climate change, climate experts believe we need to drive carbon emissions down to net-zero.

This infographic from MSCI shows five climate indexes that can help align investor portfolios to the goals of the Paris Agreement, mitigate emissions, and reduce fossil fuel exposure.

What is Net-Zero?

Net-zero targets are a clearly marked pathway for companies to reduce greenhouse gas (GHG) emissions in line with the Paris Agreement.

The Paris Agreement’s goal is to limit global warming to well below 2°C, preferably no more than 1.5°C above pre-industrial levels. Investors have a critical role to play in this transition to net-zero.

5 Types of Climate Indexes

First, here are the key metrics used to assess the environmental profile of indexes:

  • Carbon emissions: Based on tons of carbon dioxide across all constituents divided by millions of dollars invested in the index (tons CO2e/$M invested).
  • Carbon intensity: Based on tons of carbon dioxide per $1 million in sales (tons CO2e/$M sales).

Let’s look at five types of climate indexes from MSCI:

1. Climate Paris Aligned Indexes

Objective: Reduce carbon intensity by 50% compared to benchmark, annual decarbonization of 10%, increase weight in green solutions companies.

The indexes have also shown strong performance on the Climate Value at Risk (Var) metric.

Climate Var provides a forward-looking return-based assessment of how climate change could affect company valuations. For instance, a holder of MSCI ACWI would likely see an erosion of portfolio value by about 14.44% if the world were to decarbonize in line with a 1.5°C warming scenario.

A holder of a Climate Paris Aligned Index, by contrast, would see little to no erosion in value.

MetricDescriptionClimate Paris Aligned IndexBenchmark Index
What was the historical climate performance?88% lower carbon emissions than the reference index11 tons CO2e/$ million invested89 tons CO2e/$ million invested
Key climate feature*Climate Value at Risk (Var)0%-14.44%
Index performance
(Five-year annualized return as of Sep 30 2021)
Outperformed benchmark MSCI ACWI Index15.40%13.80%

*As of May 2021 semi-annual index review

2. Climate Change Indexes

Objective: Reduce carbon emission intensity by 30% compared to benchmark, annual decarbonization of 7%, increase weight in green opportunity companies.

Green opportunity companies may include green bonds, companies with low carbon patents, or provide exposure to UN Sustainable Development Goals. These are companies which see opportunity from the climate transition.

MetricDescriptionClimate Change IndexBenchmark Index
What was the historical climate performance?62% lower carbon emissions than reference index34 tons CO2e/$M invested89 tons CO2e/$M invested
Key climate featureCarbon intensity is at least 50% lower than that of the benchmark32 tons CO2e/$M sales205 tons CO2e/$M sales
Index performance
(Five-year annualized return as of Sep 30 2021)
Outperformed benchmark MSCI ACWI Index15.70%13.80%

3. Low Carbon Target Indexes

Objective: Minimize carbon footprint by 50% based on exposure to carbon emissions and fossil fuel reserves.

The carbon footprint covers two key metrics:

  • Low carbon emissions (relative to sales)
  • Low potential carbon emissions (per dollar of market capitalization)
MetricDescriptionLow Carbon Target IndexBenchmark Index
What was the historical climate performance?78% lower carbon emissions than the reference index20 tons CO2e/$M invested89 tons CO2e/$M invested
Key climate featureMinimize carbon intensity66 tons CO2e/$M sales156 tons CO2e/$M sales
Index performance
(Five-year annualized return as of Sep 30 2021)
Performed equally to MSCI ACWI Index benchmark13.80%13.80%

4. Fossil Fuels Exclusion Index

Objective: Represent broad market performance while excluding companies that own oil, gas and coal reserves.

MetricDescriptionFossil Fuels Exclusion IndexBenchmark Index
What was the historical climate performance?Carbon emissions were reduced by 34% compared to the reference index59 tons CO2e/$M invested89 tons CO2e/$M invested
Key climate featureProportion of index invested in fossil fuel reserves0%5%
Index performance (Five-year annualized return as of Sep 30 2021)Outperformed benchmark MSCI ACWI Index14.30%13.80%

5. Environment Indexes

Objective: Select companies that derive at least 50% of their revenues from environmentally beneficial products and services.

The green to fossil fuel-based net revenue exposure compares revenues from green companies in relation to companies with revenues from fossil fuel. This can be used as a metric to assess the shift from fossil fuel-related activities to greener alternatives.

MetricDescriptionEnvironment IndexBenchmark Index
What was the historical climate performance?Included companies that derive at least 50% of revenues from green energy* 99%9.10%
Key climate featureGreen/fossil fuel-based net revenue exposure192.73
Index performance
(Five-year annualized return as of Sep 30 2021)
Outperformed benchmark MSCI ACWI Index23.60%13.80%

*Cumulative measure across holdings, includes alternative (renewable) energy, green buildings, sustainable water and pollution prevention

Climate Indexes: Tools for Addressing Climate Change

As investors integrate climate concerns in their portfolios, they can use indexes from MSCI to help make more informed decisions.

Climate indexes can help investors:

  1. Align with global climate goals
  2. Capture opportunities
  3. Mitigate transition and physical risks
  4. Reduce fossil fuel exposure

These climate tools can help investors with future investment strategies—and catalyze change.

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ESG Data: The Four Motivations Driving Usage

ESG controversies can damage a company’s value, but ESG data may be able to help manage this risk. What are other reasons for using ESG data?



ESG Data: The Four Motivations Driving Usage

Data is key to the environmental, social, and governance (ESG) revolution. Access to granular ESG data can help boost transparency for market participants. Unfortunately, 63% of U.S. and European asset managers say a lack of quantitative data inhibits their ESG implementation.

Being clear on the potential application of this data is equally important.

  • Investors and banks can use ESG data for risk assessment, to spot opportunities, and to push companies for change.
  • Companies can publish their own ESG data, quantify progress on their ESG goals, and use data to inform decisions.
  • Policymakers can use ESG data to inform regulatory frameworks and measure policy effectiveness.

This graphic from ICE, the second in a three part series on the ESG toolkit, explores four primary motivations of ESG data users.

1. Right Thing

The objective: Having a positive social or environmental impact.

For investors, this can involve screening out companies that conflict with their values and selecting companies that align with their ESG objectives.

As another example, it can involve comparing the social impact of municipal bonds. One way investors can measure social impact is through scores that quantify the potential socioeconomic need of an area, using metrics like poverty and education levels. Here are the social impact scores for three actual municipal bonds issued in Florida.

StateBond IssuerSocial Impact Score
(Higher = larger potential impact)
FloridaIssuer #176.5
FloridaIssuer #266.6
FloridaIssuer #343.2

Issuer #1’s bond is projected to have a community impact that is nearly twice as high/positive as Issuer #3’s bond.

For companies, doing the right thing can include assessing their progress on ESG goals and benchmarking themselves to peers. For example, gender and racial representation is a growing area of focus.

2. Risk

The objective: Managing ESG risks, such as climate and reputational risks.

For investors, this can involve back-testing or analysis around specific risk events before they materialize. Here are the risk profiles of two actual municipal bonds in California. The shown bonds are practically identical in many ways, except their wildlife score.

 Issuer #1Issuer #2
Current Coupon Rate5.0%5.0%
Maturity DateAug 01, 2048August 01, 2048
S&P RatingAAAA
Price to Date (Call Date)Aug 01, 2027Aug 01, 2027
Wildfire Score (Higher = more risk)3.62.7

Managing ESG risk can also involve analyzing a company’s policies and governance for weaknesses. This is important as an ESG controversy can have long-lasting effects on the valuation of a company.

In one study, companies with ESG controversies dropped more than 10% in value relative to the S&P 500. They hadn’t fully recovered a year after the incident.

3. Revenue

The objective: Targeting outperformance through ESG analysis.

Selecting companies with strong ESG data can align with long-term growth trends and may help boost performance. For heavy emitting industries, research indicates that European companies with lower emissions trade at much higher valuations. The chart below shows companies’ price-to-book ratio relative to the Stoxx 600* sector median.

Above Median Emission Intensity (Bad)
Below Median Emissions Intensity (Good)

*The Stoxx 600 Index represents large, mid and small capitalization companies across 17 countries of the European region: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

Energy companies with low emissions trade at a valuation nearly two times higher than energy companies with high emissions.

4. Regulation

The objective: Understanding and complying with relevant ESG regulation.

The International Sustainability Standards Board has announced a global reporting proposal aligned with the Task Force on Climate-related Financial Disclosures (TCFD). In addition, a growing number of jurisdictions will require organizational reporting that aligns with the TCFD.

  • Brazil
  • European Union
  • Hong Kong
  • Japan
  • New Zealand
  • Singapore
  • Switzerland
  • UK

Not only that, a European Union regulation known as Sustainable Finance Disclosure Regulation (SFDR) came into effect in 2021. It seeks greater transparency in disclosures from firms marketing investment products. Even firms located outside the EU could be impacted if they serve EU customers. In total, the market cap of these non-EU companies exposed to SFDR amounts to $3.2 trillion.

Matching ESG Data with Motivation

There will be growing demand for transparent data as ESG investing flourishes. To remain competitive, investors, policymakers, and companies need access to ESG data that meets their unique objectives.

In Part 3 of the ESG Toolkit series sponsored by ICE, we’ll look at key sustainability index types.

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The Hierarchy of Zero Waste

In a world that generates 2 billion tonnes of waste every year, waste management has become a global concern. Here are some strategies to help guide zero waste policies.




The Hierarchy of Zero Waste

Many cities have set ambitious zero waste targets in the upcoming decades.

The idea is to have communities where waste generation is avoided, and products are shared, reused, or refurbished.

This graphic, sponsored by Northstar Clean Technologies, shows the main strategies and hierarchy to guide zero waste policies.

What is Zero Waste?

In a world that generates approximately 2 billion tons of waste every year, waste management has become a global concern. Thus, countries and cities are increasing efforts to reduce or even eliminate waste when possible.

The Zero Waste International Alliance defines zero waste as “the conservation of all resources  by means of responsible production, consumption, reuse, and recovery of products, packaging, and materials without burning and with no discharges to land, water, or air that threaten the environment or human health.”

Becoming a zero waste community, however, is a complex task.

Currently, Sweden recycles 99% of locally-produced waste and is considered the best country in the world when it comes to recycling and reusing waste. However, such results only came after almost 40 years of recycling and reuse policies.

In line with this, here are seven commonly accepted steps you can use to achieve zero waste:

1. Rethink, Redesign Products

The global population consumes 110 billion tons of materials each year, but only 8.6% is reused or recycled. In a zero waste society, single-use products are avoided and products are designed with sustainable practices and materials.

2. Reduce

Consumption must be planned carefully to reduce the unnecessary use of materials. Consumers must choose products that maximize the usable lifespan and opportunities for continuous reuse. Companies must minimize the quantity and toxicity of materials used.

3. Reuse

The value of products is maintained by reusing, repairing, or refurbishing for alternative uses.

4. Recycle

Products are diverted from waste streams and recirculated into use. Resilient local markets are developed, allowing the highest and best use of materials.

5. Material Recovery

Component materials like cement, metals, or asphalt are recovered from mixed waste and collected for other applications.

In the U.S. alone, around 12 million tons of asphalt shingle tear-off waste and installation scrap are generated from roof installation each year. Currently, more than 90% of this is discarded in landfills. This material can be repurposed to create new products like liquid asphalt, fiber, and aggregate.

6. Residuals Management

Waste is biologically stabilized and sent to responsibly managed landfills.

7. Unacceptable

The production of materials that are not recoverable and can negatively impact the environment must be avoided.

Reducing our Climate Impact

Reducing, recycling, and recovering materials can be a key part of a climate change strategy to reduce our greenhouse gas emissions.

According to the U.S. Environmental Protection Agency, about 42% of all greenhouse gas emissions are caused by the production and use of goods, including food, products, and packaging.

Even though 100% zero waste may sound difficult to achieve in the near future, a zero waste approach is essential to reduce our impact on the environment.

Northstar Clean Technologies aims to become the leading recovery and reprocessing company for asphalt shingles in North America.

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