20 Jan 2021
20 Jan 2021
At Lyxor, we don’t just talk about climate change. We try to do something about it. This week, we took a major step along that path by becoming the first ETF provider in the world to publish temperatures for most of the indices underpinning our funds.
These temperatures make it much simpler for investors to compare the warming impact of their investments to the targets of the 2015 Paris Agreement – to limit global warming to no more than 2°C above the pre-industrial level, and ideally 1.5°C. For the first time, you can see exactly how more than 150 Lyxor ETFs align with this goal.
The time for empty talk is over. Read on to learn more about Lyxor’s new COtool for ETFs, and what it means for corporate responsibility and the future of investing.
Let’s start slowly. Why did you release this kind of information?
It’s simple: we believe it’s high time we all had a better way to judge where to put our money. The global investment community is responsible for vast amounts of wealth, but it doesn’t always have the tools needed to deploy this wealth in the most impactful way.
More broadly, we recognise that the financial industry is on the cusp of a revolution. A revolution where total transparency and honesty rule – where investors have all the information and tools that they need to make truly informed investment decisions.
By publishing index temperatures, we can identify the real deal, and clearly see how a fund helps or hinders climate action.
That’s a bold claim. Can you prove that your temperatures are the real deal?
We have analysed all the various options to measure a portfolio’s alignment with the Paris Agreement – and yes, we believe our methodology gives the most accurate results on temperature impact.
We’ve compared each possible climate alignment methodology to select the most consistent and comprehensive approach. Because of that, we stand by our methodology, and its benefits and limitations compared to all other methodologies under development.
Our approach starts with a third-party data provider, to guarantee an independent view on the temperature impact of our funds. Not just any third party: Trucost, a climate and ESG data leader and part of S&P Global. Trucost delves into each of the individual companies of an index to analyse their past, current, and forecast emissions. These emissions define the decarbonisation trajectory for that company. For our part, we take all of Trucost’s data on those companies, and use it to calculate a temperature for the index – and the ETF tracking it.
Trucost uses two different approaches to score the temperature impact of companies in the indices tracked by our ETFs. These two approaches are recommended by several international climate organisations such as the Science Based Targets Initiative, a leader in decarbonisation target-setting.
For companies in carbon-intensive sectors – think power production, steel, or aviation – temperature impact is assessed with the Sectoral Decarbonisation Approach (SDA). This assesses temperature impact through a measure known as ‘carbon intensity’, in this case based on a physical unit such as a kilowatt hour of energy or ton of steel.
For other sectors, the Greenhouse Gas Emissions per unit of Value Added (GEVA) approach is used. As opposed to physical units, this assesses carbon intensity and temperature impact using emissions generated per unit of economic value.
These measures give us a temperature for each eligible ETF, which is any ETF for which more than 80% of its assets are covered by Trucost’s database.
This is technical stuff, and like all methodologies it has its pluses and minuses. But we believe it’s the most robust way to measure climate impact that is available today.
That is technical indeed. What can I learn from a fund’s temperature?
In a nutshell, you can see the implied impact your investments could have on global warming, based on forecast data for the next five years.
Scientists tell us that effects of global warming of +3°C above pre-industrial levels would be devastating for the planet. Our data shows that several of the world’s major ‘business as usual’ indices are currently pointing towards that outcome. That might change – and our tool will tell you when it does.
You might also wonder what a high figure might mean for a fund’s long-term returns. Could it suggest underlying risks which aren’t being reflected in its price?
However, you should also remember that a temperature score is unavoidably based on some assumptions. It combines historical data with other data that is forecast or modelled into the future, such as estimates of future carbon emissions. It’s based on the best information that is available at a given moment, so it won’t be perfect in every situation.
Sometimes there will be a change which results from updates to the underlying assumptions, rather than a real increase or decrease of emissions generated by the fund’s issuers. A temperature can fluctuate based on changes to a fund’s composition, issuer values within that fund, or updates to scenario trajectories.
Without a doubt, these models will keep evolving. But we believe the information is too important to hide or delay.
I want to check my ETF’s temperatures. How do I use the tool?
Lyxor’s temperature score tool, called the COtool, is available here.
Filter by asset class, market, and/or exposure to display the warming impact your investments currently imply over the years to come – and compare with others to discover more climate-friendly options.
In the weeks ahead, we will examine some of the most interesting results from the tool and address any specific questions we receive.
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