The EU finalizes the launch of its climatic indices

European climate indices will see the light imminently. The EU has worked quickly to get a series of recommendations approved that will allow private providers to launch stock indices with a kind of European climate quality seal, as long as they prepare them following the criteria established by the European Commission. The adoption of these standards by the Commission should be very close, bearing in mind that it was expected (according to the institution’s own timetable) to have occurred in the first quarter of this year.

The recommendations for developing these climate indices were presented a few months ago by the Commission’s Technical Expert Group designated for this purpose (the TEG). Once approved, they will need to be transposed into national laws, but the whole process is expected to be completed by 2022.

What has been created are the standards for two types of selectives: the Climate Transition Indices and the Indices Aligned with the Paris Agreement. Suppliers are already willing to adopt them: one of the leading global index factories, the S&P Dow Jones group, has announced the launch of its S&P Eurozone LargeMidCap Paris- Aligned Index, and the S&P Eurozone LargeMidCap Climate Transition Index. In the future, the same group will release more indicators of both types and for other geographies and sizes: “In the coming months, S&P Dow Jones plans to announce the creation of more indices following these two benchmarks.” It could extend them to the different regions and countries of Europe, the United States and other developed markets.

Looking now towards Spain, is any supplier considering developing a kind of climate version of the Ibex? Sources from Bolsas y Mercados Españoles (BME) point out that the new regulation is very recent and that a new family of sustainability indices is not something that is believed overnight, but they recognize that “BME, as a manager of significant indices, is working intensively in this line”.

As explained in the EU regulation 2019/2089 on benchmarks, today there is a “divergence of approaches in terms of methodologies” related to these selectives, which causes its users not to know “with certainty if a certain low carbon impact index is in line with the objectives of the Paris Agreement or simply aims to reduce the carbon footprint of a standard investment portfolio”. Hence the need to regulate them more thoroughly.

Climate, unsustainable

The two types of indicators whose standards have been created are not sustainable or ESG (an acronym used to refer to environmental, social and governance criteria), but are focused exclusively on A (on the environment) and, more particularly, on the climate transition. Both will incorporate, along with the profitability objectives, “specific objectives related to the reduction of greenhouse gas emissions and the transition to a low-carbon economy, through the selection and weighting of its components” as explained in the final report on benchmarks of the group of experts.

The major sustainability benchmarks best known today respond to ESG criteria, not only climatic – although it is true that the MSCI family of indices has a range of selective climate change indices. But Verónica Sanz, head of analysis and studies at Spainsif, clarifies: “In reality, although the raison d’être [de estos dos nuevos benchmarks europeos] is purely environmental, they do not ignore social aspects and good governance; for example, they exclude certain sectors [lo cual entraría en la categoría de gobernanza]with controversial activities.” The EU has prioritized these indicators and not others because the main problem it detects at the moment is the fight against climate change, but it is not ruled out that in the future it lays the foundations for the construction of ESG indices, either focused on the S, or on the G.

Requirements to enter the index

The great advantage of these new selectives – or, rather, these two standards for the elaboration of selectives – is that the indicators that arise from them will be comparable to each other. Each has its own requirements: the Aligned with the Paris Agreement is stricter than the Climate Transition Agreement in terms of the level of greenhouse gas emissions allowed to its members, which must be 50% lower than that of the investment universe -that is, the total number of companies in which you can invest-, compared to the lower 30% required in the Climate Transition.

In addition, both types of indices must reduce the greenhouse gas intensity by at least 7% each year (this requirement is for the index as a whole; there is no requirement for individual companies). And the two will exclude, among others, companies linked to what are called “controversial weapons”, as well as those that generate “significant damage” to the environment).

To these exclusions, the Indices Aligned with the Paris Agreement – which owe their name to the pact signed in 2016 within the United Nations to reduce emissions – add others for companies that make money from coal, oil or gas. The goal is to move towards zero emissions.

Will these indices be purer than the ones we know today? One of the objectives pursued by the Commission is precisely to combat greenwashing – the use of the green label as a mere marketing tool. The new selectives “will be more orderly. All of them will meet the same requirements,” explains Sanz.

The data necessary to access or not to access these indices would fall within the non-financial information section. Will this make it difficult for small Spanish companies, less obliged than large ones to provide this data, to choose to enter? Sanz does not believe it: “On the one hand, more and more small companies have to report this type of information. On the other hand, most Spanish companies are quite aligned with the decarbonization requirements that are being encouraged,” he says.

Source: The Economist