Introducing the State Street S&P Global Investor Carbon Indicator
There’s a lot of talk about decarbonization in the investment industry, but little hard data. At State Street we’re changing that.
We have teamed up with S&P Global to create a measure on how institutional investor are managing the carbon emissions associated with their stock portfolios. And the insights are revealing.
By combining millions of dollars in aggregated and anonymized institutional investor assets data from State Street with S&P’s true cost carbon emissions data, we’ve created a unique tool that measures the degree that large investors, mutual funds, pensions, sovereign wealth funds, are decarbonizing their portfolios in aggregate.
Why does this matter? For one, carbon has become an important risk factor for all investors. We can see this in the data. Many investors are looking at carbon in their portfolios alongside long time factors like dividends and earnings. And our clients looks to us for insights into risks that could impact their portfolios and help them manage assets and measure exposures based on their goals.
But there is another reason why this information is so important and it transcends finance and investments. Big institutional investors are different from individual investors. Many of them have incredibly long investment horizons, so their concerns of risk like climate play out over decades rather than years. and they’re big, some of them are very big. So when they move, think of an oil tanker cruising at full speed, they make waves.
What do these waves look like? when it comes to managing carbon emissions, a portfolio manager has a number of levers to pull.
One is that they can sell shares which in aggregate may reduce demand for those companies’ stock and can serve to increase its cost of capital.
Another is to keep holding the shares, but to engage with management of the companies and encourage them to lower emissions.
So, for example, a portfolio’s carbon exposure will be reduced if the portfolio manager sells shares of an oil and gas company. But it would also be reduced if the portfolio manager continues to hold those shares and put the pressure on the company to reduce its carbon emissions And this is a really important point because both actions can reduce the portfolio’s carbon exposure, but they do it in different ways, many investors do both. And that’s the beauty of the State Street S&P Global investor carbon indicator is that it can be decomposed into components that align with these different levers. Investor behavior captures the degreed which portfolio managers are increasing or decreasing their exposure to carbon emitting firms at the portfolio level.
We also captured company behavior, and that’s the degree to which company management is increasing or reducing the overall carbon emissions of the firm. We also look at relative price effects which captures the effect that changing in the company valuations have on the overall weighted average carbon exposure But that’s not all. We also breakdown the data by geography. As well for example, compare U.S companies to European companies, and you’ll find that Europe companies has been reducing its carbon exposure for longer and done so by larger amount we can even look not only over all emissions but the efficiency way with which companies use emissions to generate revenues, Here is an example of that In 2022, across the global economy, energy prices soared. And by tilting a portfolio towards stocks that used energy and input more efficiently and thereby emitted less carbon than their competitors, and investor would have actually outperformed the market by a healthy margin. By sticking to the facts, we hope that the investor carbon indicator will be a useful tool for investors, policymakers, and the public at large to understand and navigate our changing world. ***ends***
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While decarbonization is discussed widely in the investment industry, there is not enough hard data to support it. To change that, we’ve partnered with S&P Trucost, powered by S&P Global Sustainable1 to create a measure that helps investors, the media, policymakers and the public at large understand how some of the world’s most influential investors are managing carbon risk.
Our Carbon Indicator combines trillions of dollars of aggregated and anonymized institutional investor positioning data from State Street with S&P Global’s carbon emissions data to create a unique tool that measures the degree large investors — like mutual funds, pensions and sovereign wealth funds — are decarbonizing their portfolios in aggregate.
At its highest level, the indicator has two variants: emissions — tonnes of carbon emitted by portfolio companies, and intensity — calculated as tonnes of carbon divided by company revenue. While emissions captures the overall volume of carbon emitted, intensity measures how efficiently companies “use” carbon to generate revenues. Beneath these headline measures, we can break down movements in the Carbon Indicator into several components to better understand what is driving them.