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NEWSLETTER
Issue 35, January/February 2022 | www.scientificbeta.com
BRIDGING THE GAP BETWEEN ACADEMIA AND INDUSTRY
--------------------------------------------------------------------------------
EDITORIAL
Daniel Aguet, Index Director, Scientific Beta
Maurizio Luisi, Senior Quantitative Equity Analyst, Scientific Beta
PERFORMANCE IN 2021 MOSTLY DRIVEN BY POSITIVE INFLATION SURPRISES
Inflation in the US rose faster than expected to a near 40-year high at the end
of 2021, with inflation accelerating beyond expectations. As a result, last year
was mostly characterised by unexpected inflation shocks or positive inflation
surprises.
Inflation in the US, as measured by consumer prices, accelerated to record
levels in 2021, with a yearly increase of almost 7%. Consensus forecasts were
lower than realised figures eight times out of twelve, as reported in the graph
below. This highlights that realised inflation was stronger than economists were
expecting. Similarly, monthly changes of 1-year expected inflation, as measured
by the University of Michigan consumer survey, were positive seven times out of
twelve, as reported in the graph below. This survey reflects consumer
anticipation of future inflation for the next year and is therefore a
forward-looking measure, whereas consumer prices only reflect realised past
inflation.
Consumer Prices vs 1-Year Inflation Expectations in 2021
This graph reports differences between Realised and Consensus figures for
headline year-on-year Consumer Price releases. Differences between CPI released
numbers and consensus forecasts are as reported by Bloomberg on CPI release
dates. A positive difference is defined as an actual release which exceeds its
consensus forecast; conversely, a negative difference is defined as an actual
release below its consensus forecast. This graph also reports the month-on-month
changes of the University of Michigan (UoM) 1-Year Inflation Expectations. Data
sources: Scientific Beta, Bloomberg.
Surprises Matter
In line with the consensus on expected inflation measures, Scientific Beta's
measure of expected inflation is based on observable market prices defined as
the difference between the yield of nominal 10-Year Treasury bonds and 10-Year
TIPS (Treasury Inflation Protected Securities), namely 10-Year Breakeven
Inflation. We use weekly changes in breakeven inflation to measure expected
inflation surprises or innovations. The current value of assets already reflects
information that is known to investors today. As new information arrives, asset
prices, including stocks, will adjust accordingly. This is why we are interested
in surprises, since the level of expected inflation that is fully anticipated by
investors will not lead to different price reactions across stocks. The table
below shows how many weeks corresponded to positive and negative inflation
surprises, as well as stable inflation environments. In 2021, 21 weeks, or 40%
of the sample, were characterised by positive inflation surprises, which is 15%
more than what we would expect on average. These results are in line with the
measure of consumer prices or the University of Michigan survey.
2021 Ruled by Positive Expected Inflation Surprises
The analysis ranges from 31-Dec-2008 to 31-Dec-2021. Negative Inflation Surprise
periods are defined as the bottom quartile of weekly innovations of the 10-Year
Breakeven Inflation, where positive Inflation Surprise periods are defined as
the top quartile of weekly innovations of the 10-Year Breakeven Inflation. All
instances of weekly Breakeven Inflation changes that fall in between the top and
bottom quartile are assigned to the Stable Inflation periods.
To benefit from inflation surprises, Scientific Beta has developed an advanced
methodology to measure the sensitivity of stocks to such surprises, whether they
be positive (excess realised inflation compared to expectations) or negative
(lower realised inflation compared to expectations). The Scientific Beta
Inflation indices are designed to offer good conditionality to periods of
positive or negative surprises in expected inflation. The SciBeta Inflation+
index tilts stock weights in the reference cap-weighted index towards stocks
that have positive exposure to surprises in expected inflation and, conversely,
the US Inflation- index tilts stock weights towards stocks that are sensitive to
negative inflation surprises. In the table below, we underline the good
conditionality of the Inflation+ Index in 2021, since it outperformed the
cap-weighted benchmark by +5.67% during periods of positive inflation surprises.
Moreover, these observations are robust with regard to alternative measures of
inflation expectations. Indeed, when we define periods of positive (negative)
inflation surprises as top (bottom) quartiles of monthly changes of the
University of Michigan 1-Year Inflation Expectations survey, we observe that the
SciBeta Inflation+ index delivered conditional relative returns of +2.81% and
-1.35% respectively, consistently maintaining the desired conditionality.
SciBeta Inflation+ index Outperformed in Periods of Positive Expected Inflation
Surprises
SciBeta US – 2021
Inflation+
Inflation-
Based on 10-Year Breakeven Inflation Surprises Negative Inflation Surprises
-2.31%
1.21%
Positive Inflation Surprises
5.67%
-2.93%
Based on University of Michigan 1-Year Expected Monthly Surprises
Negative Inflation Surprises
-1.35%
0.69%
Positive Inflation Surprises
2.81%
-1.64%
The analysis is based on daily USD total returns from 31-Dec-2020 to
31-Dec-2021. Relative return figures are computed as cumulative relative
performance of inflation indices compared to the CW index in the different
regimes. For 10-Year Breakeven Inflation, positive and negative surprises are
defined as top and bottom quartiles of weekly breakeven inflation innovations.
For University of Michigan 1-Year Inflation Expectations, positive (negative)
inflation surprises are defined as top (bottom) quartiles of monthly changes of
the University of Michigan index. The indices used are the SciBeta US Inflation+
and SciBeta Inflation- as well as the SciBeta US Cap-Weighted index. Data
sources: Scientific Beta, Bloomberg.
Investors tend to use other asset classes or very specific equity sectors or
styles to protect their portfolios against inflation, for instance, they might
use TIPS, commodities, financials, REITs or small capitialisation companies
(small caps). In the table below, we compare the behaviour of the SciBeta
Inflation+ index and these different assets since December 2008, the base date
of our inflation indices. The first observation is that both commodities and
REITs underperformed the equity benchmark in regimes of positive inflation
surprises, whereas all the other assets outperformed. In addition to this poor
conditionality, there is no economic reason for a long-term premium for
commodities and we observe that their average annual performance since 2008 was
negative, while the CW and the SciBeta Inflation+ index delivered an average
annual performance close to 16%. Concerning REITs, not only did they
underperform in periods of positive surprises, but they outperformed in periods
of negative surprises, leading to a negative conditional spread, namely the
difference of relative returns between positive and negative surprises, of
-35.98%. Hence, we can conclude that both commodities and REITs are poor assets
to protect portfolios against inflation for an investor with an equity
perspective.
The second observation is that small caps and financials delivered the strongest
relative returns in regimes of positive inflation surprises with +35.72% and
+29.99% respectively, while the SciBeta Inflation+ index outperformed by
+13.53%. We observe the same ranking when looking at the conditional spread.
However, picking the financial sector or small caps may lead to other sources of
idiosyncratic risks that equity investors may wish to avoid, including lack of
diversification which can lead to poor risk-adjusted returns and high tracking
error. Indeed, when we look at the conditional spread per unit of tracking
error, we observe that the SciBeta Inflation+ index has the strongest ratio
(6.1) among all other assets, which demonstrates that it offers good
conditionality to inflation surprises. Hence, the SciBeta Inflation+ index
delivers a Sharpe ratio that is in line with the equity benchmark, because of
its low tracking error, while small caps and financial companies have much lower
risk-adjusted performance.
The third observation is that TIPS delivered conditional absolute returns that
are close to those of the SciBeta Inflation+ index, slightly below in regimes of
positive inflation surprises and slightly above in periods of negative inflation
surprises. This is clear evidence that the SciBeta Inflation+ index can be a
useful complement in an asset liability management framework to compensate
losses in bond portfolios which are often used to hedge liabilities that are
explicitly or implicitly linked to inflation and for which hedging through TIPS
is often prohibitively expensive.
To conclude, the SciBeta Inflation+ index offers good conditionality to expected
inflation surprises and delivers equity benchmark risk-adjusted performance over
the long-term. This makes this index the most appropriate candidate among other
assets to protect equity portfolios against inflation.
Conditional and Risk-Adjusted Performance of Traditional Assets Used for
Inflation Protection
SciBeta US
Dec 2008 to Dec 2021
CW
Inflation+
TIPS*
Financials
Commodities
Small-Caps
REITS
Conditional Relative Performance in Different Breakeven Inflation Surprises
Negative Inflation Surprises
-
-3.60%
-1.87%
-11.36%
-16.16%
-10.08%
7.20%
Positive Inflation Surprises
-
13.53%
8.74%
29.99%
-2.34%
35.72%
-28.78%
Conditional Spread
-
17.13%
10.61%
41.35%
13.83%
45.80%
-35.98%
Conditional Spread / TE
-
6.1
n/r
3.2
0.6
4.2
n/r
Risk-Adjusted Performance
Ann. Absolute Returns
15.93%
16.62%
4.71%
12.73%
-2.76%
13.73%
10.29%
Ann. Volatility
18.04%
18.83%
5.31%
25.82%
21.95%
23.87%
27.28%
Sharpe Ratio
0.86
0.86
0.80
0.47
n/r
0.55
0.36
Ann. Tracking Error
-
2.83%
-
12.99%
21.36%
10.79%
18.32%
The analysis is based on daily USD total returns from 31-Dec-2008 to
31-Dec-2021. The indices used are the SciBeta US Inflation+, the SciBeta US
Cap-Weighted index, the Scientific Beta Financial Cap-Weighted (based on TRBC
classification), the S&P GSCI Commodities Index, the FTSE Russell 2000, the FTSE
USA REITS Index, and the Bloomberg US Treasury Inflation Notes Total Return
Index Unhedged USD (TIPS). Conditional relative performance figures are computed
as cumulative relative performance of the different indices in excess of the CW
index in top (positive surprise) and bottom (negative surprise) quartiles of
weekly inflation innovations. Innovations are computed as weekly changes in the
10-Year Breakeven Inflation Rate. Conditional spread is the difference between
returns in Positive and Negative Inflation surprises. Data sources: Scientific
Beta, Bloomberg. *For the conditional performance analysis, we used absolute
returns, since the natural benchmark for treasury securities is the risk-free
rate.
Protecting your Equity Portfolio against Inflation, Scientific Beta overview,
July 2021
Macro-Tilted Equity Indices: Protecting your Equity Portfolio against Inflation
and other Macro Surprises, forthcoming P&I webinar with Scientific Beta, 9
February, 2021
FEATURE
A focus on Scientific Beta's latest research.
UPDATED TCFD RECOMMENDATIONS AND GUIDANCE: IMPLICATIONS FOR CORPORATES AND
INVESTORS
In 2015, considering that insufficient information about climate risks and
opportunities faced by companies was harming efficient asset pricing and capital
allocation and could pose a risk to financial stability, the Financial Stability
Board established the Task Force on Climate-related Financial Disclosures to
develop recommendations for the voluntary provision of decision-useful
information for the benefit of investors, lenders and insurance underwriters.
Released in June 2017, the TCFD recommendations (TCFD 2017a and 2017b) have
rapidly become a central reference for the reporting of financially material
climate-related risks and opportunities. In October 2021, the TCFD published a
status report highlighting the accelerated uptake of its recommendations (TCFD,
2021c) along with a new Guidance on Metrics, Targets, and Transition Plans
(TCFD, 2021d) and the first update to the implementation guidance on its 2017
recommendations (TCFD, 2021e), which was produced after a consultation with
stakeholders to which Scientific Beta contributed directly and as a member of
the Institutional Investors Group on Climate Change (IIGCC). In a recent
overview paper (Overview: TCFD Recommendations and 2021 Guidance), we review the
background and architecture of the TCFD recommendations and present the 2021
guidance. In this short piece, we briefly present the framework of the TCFD
recommendations, focus on new or updated disclosures requirements and advice,
discuss issues that have been resolved or remain pending and conclude on the
relevance for our strategies.
Climate-Change Related Risks and Opportunities and Financial Performance
The TCFD adopted the consensual categorisation of climate-related risks into
physical risks, which relate to acute climate events or longer-term shifts in
climate patterns, and transition risks, which pertain to policy, legal,
technology, and market changes triggered by the need to combat or adapt to
climate change. Climate change mitigation and adaptation efforts may also
produce opportunities for organisations such as revenues from products and
services benefitting from these efforts or cost savings from improved efficiency
or access to lower-cost energy sources.
To make more informed financial decisions, stakeholders need to assess the
extent to which these climate-related risks and opportunities may impact the
future financial performance of an organisation (as reflected on its income and
cashflow statements), position (as reflected on its balance sheet), as well as
the terms and conditions of its access to capital markets.
Naturally, the financial impacts of climate-related issues on an organisation
will depend both on its exposure to climate-related risks and opportunities, and
on its management of risks (which it may attempt to mitigate, transfer, accept,
or control) and opportunities.
TCFD Recommendations and Recommended Disclosures – Overview and Principles
The TCFD recommendations and recommended disclosures are organised around four
pillars: Governance, Strategy, Risk Management and Metrics and Targets and 11
associated disclosures (see Table 1). Implementation guidance is provided for
all sectors and supplemental guidance is offered for financials (Banks;
Insurance Companies; Asset Managers and Asset Owners) and sectors potentially
most affected by climate change (with specific recommendations for Energy;
Transportation; Materials & Buildings; and Agriculture, Food, and Forest
Products). The TCFD recommends that entities issuing public securities adopt its
recommendations and invites all organisations to follow suit, in particular
asset managers and asset owners.
Table 1: TCFD Recommendations and Supporting Recommended Disclosures (TCFD,
2017a)
Pillar Recommendation
Supporting Disclosures
Governance
Disclose the organisation’s governance around climate-related risks and
opportunities. 1. Describe the board's oversight of climate-related risks and
opportunities.
2. Describe management's role in assessing and managing climate-related risks
and opportunities. Strategy
Disclose the actual and potential impacts of climate-related risks and
opportunities on the organisation’s businesses, strategy and financial planning
where such information is material. 3. Describe the climate-related risks and
opportunities the organisation has identified over the short, medium, and long
term.
4. Describe the impact of climate-related risks and opportunities on the
organisation's business, strategy, and financial planning.
5. Describe the resilience of the organisation's strategy, taking into
consideration different climate-related scenarios, including a 2°C or lower
scenario. Risk Management
Disclose how the organisation identifies, assesses, and manages climate-related
risks. 6. Describe the organisation's processes for identifying and assessing
climate-related risks.
7. Describe the organisation's processes for managing climate-related risks.
8. Describe how processes for identifying, assessing, and managing
climate-related risks are integrated into the organisation's overall risk
management. Metrics and Targets
Disclose the metrics and targets used to assess and manage relevant
climate-related risks and opportunities where such information is material. 9.
Disclose the metrics used by the organisation to assess climate-related risks
and opportunities in line with its strategy and risk management process.
10. Disclose Scope 1, Scope 2, and if appropriate, Scope 3 greenhouse gas (GHG)
emissions, and the related risks.
11. Describe the targets used by the organisation to manage climate-related
risks and opportunities and performance against targets.
Disclosures related to Governance and Risk Management should be included in
annual financial filings irrespective of financial materiality whereas those
pertaining to Strategy and Metrics and Targets pillars should generally be
included subject to materiality.
Asset managers and owners are also expected to integrate TCFD recommendations
into their reporting to clients and beneficiaries and approach the question of
materiality in the context of their mandates and investment performance.
Changes in Overall Guidance on TCFD Recommended Disclosures
Governance
Disclosures in relation to governance are meant to help users understand the
role of the organisation's management in assessing and managing climate issues
and the organisation of the board's oversight of these issues; guidance on these
disclosures is unchanged.
Strategy
Disclosures in relation to strategy are meant to help users understand how
climate-related issues may impact the organisation's businesses, strategy and
financial planning at different time horizons and inform expectations about
financial performance. They can also help users assess the extent to which the
strategy incorporates climate issues.
As the amount of reporting in relation to the financial impact of climate change
remains limited, the TCFD underlines the importance of such reporting and its
updated guidance suggests that companies discuss the potential impact of
climate-related issues on financial performance and financial position (in the
context of required disclosure #5).
Taking note of the growing interest in transition plans supporting climate
targets, it also introduces a requirement to disclose information on such plans
(in the context of disclosure #4) whenever organisations have made explicit or
implicit decarbonisation commitments or operate in jurisdictions that have
committed to decarbonisation. Key information to be disclosed include emissions
performance; impact of transition on organisation; and measures taken, including
emissions reduction targets and planned changes to businesses and strategy.
Risk management
Disclosures in relation to risk management are intended to help users evaluate
the reporting organisation's exposure to and management of climate-related
risks. This evaluation is facilitated by an understanding of the organisation's
processes for identifying, assessing, and managing existing and emerging
climate-related risks and of their degree of integration into the organisation's
overall risk management architecture guidance on these disclosures is unchanged.
Metrics and targets
Disclosures relating to metrics and targets are intended to help users
understand how the organisation measures its climate-related risks and
opportunities and monitors its progress and performance in relation to climate
issues. Information about these metrics and targets can serve as input in
assessments of default risks or risk-adjusted returns. Such information may also
be used to assess organisational impact on climate change.
Towards the standardisation of key metrics
While the 2017 guidance (TCFD, 2017b) called for organisations to disclose the
key metrics used to measure and manage climate-related risks and opportunities,
preparers and users of disclosures have lamented the lack of standardised
metrics. The updated implementing guidance (TCFD, 2021e) introduces a
requirement to disclose metrics consistent with seven cross-industry categories
(GHG emissions, transition risks, physical risks, climate-related opportunities,
capital deployment, internal carbon prices, and remuneration), but stops short
of offering standardised metrics.
Disclosure of emissions is already well established and global standards exist
for GHG emissions accounting (these allow for comparability of Scope 1 and Scope
2 emissions and create a common language to interpret corporate disclosures of
targets and metrics in relation to Scope 3 emissions – Scope 1 or direct
emissions are from sources owned or controlled by the reporting entity; Scope 2
emissions are from purchased electricity, steam, heat, and cooling; and Scope 3
emissions are other upstream and downstream value chain emissions). Preparers do
not have the same familiarity with the other metric categories and the broad
definitions used by the TCFD will limit the relevance of new disclosures until
standards are established and adhered to. Metric problems are compounded for
financial institutions acting as preparers since they need to work with sparse
and non-standardised reporting by corporates and also face specific issues with
the aggregation and presentation of results at portfolio level. The TCFD
acknowledges that some organisations will need time to start reporting along
these new categories and recognises the specific challenges faced by portfolio
managers.
There is little doubt that widespread disclosure of relevant metrics along these
cross-industry categories would considerably improve users' ability to assess
preparers' exposure to climate change risks and opportunities, and the reality
of efforts to manage risks and seize opportunities. The production of comparable
and reliable disclosures by corporates is a necessary pre-requisite to the
reporting of decision-useful metrics by asset owners and managers but not a
sufficient condition as further methodological work may be required to establish
sound methodological bases for portfolio-level metrics.
Emissions and related risks
The 2017 guidance required disclosure of GHG emissions when material. The
updated guidance requires disclosure of Scope 1 and 2 emissions irrespective of
materiality and encourages disclosure of Scope 3 emissions when materiality does
not require it. While the reporting of Scope 3 emissions, in the absence of
further standardisation, will not produce data that may reliably support direct
cross-company comparisons, it will nevertheless be very useful to track
corporate progress on value chain decarbonisation, see Ducoulombier, 2021).
Targets
The disclosure of climate-related targets has been part of recommended
disclosures since inception. The updated guidance calls for the disclosure of
targets consistent with the aforementioned cross-industry metric categories,
where relevant, and for reporting interim targets where an organisation
discloses medium- or long-term decarbonisation targets. Disclosure of interim
targets and of progress against these will go a long way towards allowing users
to assess the materiality and feasibility of decarbonisation promises.
Changes to Supplemental Guidance for Asset Owners
The updated guidance for the financial sector focuses on the addition of a
requirement to disclose the extent of alignment with a Paris-aligned temperature
scenario and on the addition of a recommended metric for reporting the weighted
average carbon intensity or emissions associated with the business or assets.
Scientific Beta engaged the TCFD about the risks of unintended and
counterproductive consequences of some of its proposed changes in these areas
and welcomes the evidence-based nature and fitness for purpose of its finalised
recommendations.
Assessing climate issues – a wise limitation of the role of portfolio alignment
tools
Since inception, asset owners (and asset managers) have been required to
describe the metrics they use to assess climate issues at fund (or product) or
strategy level and disclose what metrics are used in investment management,
where relevant. The updated guidance goes further in requiring them to disclose
the extent to which their assets (and, where relevant, their funds and
investment strategies) are aligned with a well-below 2°C scenario. Preparers are
left free to determine what approach or metrics should be used to assess
alignment.
After considering industry feedback, the TCFD shelved its proposal that would
have required all financial institutions to incorporate forward-looking
alignment metrics into their target-setting frameworks and management processes.
This comes across as a wise decision given the immaturity of portfolio alignment
tools and the risks of greenwashing and counter-productive action associated
with mandating their use at this stage. Alignment assessment methodologies have
some relevance for reporting but still lack the maturity that would be needed to
afford them a central role in portfolio construction (see notably Raynaud et
al., 2020). The review commissioned by the TCFD itself (Blood and Powis, 2021)
concedes that gaps in data and analytics are such that resulting alignments
scores diverge across providers and that: "as portfolio alignment tool adoption
increases, these gaps could become barriers to effective portfolio alignment,
expose financial institutions to greenwashing accusations, and cause investors
to make incorrect assessments about the forward-looking trajectory of portfolios
and individual investees/counterparties".
Recommended metric for reporting – balancing exposure and responsibility metrics
The 2017 implementing guidance recommended that asset owners and asset managers
report weighted average carbon intensity (WACI) to their beneficiaries and
clients. WACI is established as a proxy for overall portfolio exposure to
carbon-intensive companies and, by extension is often used as a proxy for
overall transition risk. TCFD endorsement has contributed to firming this metric
up as the market standard and it is the climate-related metric most frequently
disclosed across the investment management industry.
Where data and methodologies so allow, the updated guidance requires that these
institutions also disclose the emissions associated with each fund/product or
investment strategy, in line with the Partnership for Carbon Accounting
Financials (PCAF) Standard or a comparable methodology. The PCAF does important
work to harmonise disclosures of absolute greenhouse emissions associated with
the heterogeneous portfolios of diverse financial institutions. Its standard
requires allocating emissions from activities financed by loans and investments
to the preparer based on its proportional share of lending or investment in the
borrower or investee. These "financed emissions" thus represent the indirect
responsibility of the preparer in respect of these emissions.
Relative to the consultation proposal, the finalised guidance reaffirms WACI as
recommended disclosure for funds, products and strategies (while also requiring
the disclosure of financed emissions, where possible). This is particularly
welcome as substituting financed emissions for WACI would have encouraged the
adoption of an asset-level metric for listed companies (emissions to enterprise
value) that should not be allowed to guide security selection and issuer
engagement where the investor intends to incentivise real-world decarbonisation.
Indeed, reliance on enterprise value introduces capital market volatility into
carbon intensity measurement and obscures the relationship with real-world
emissions (see Ducoulombier and Liu, 2021). Where real-world impact is an
important investor consideration, the traditional economic intensity measure,
i.e., the ratio of emissions to revenues, while not perfect, is preferable.
Since WACI is simply the portfolio average of this asset-level metric, the
reporting of WACI is consistent with encouraging the use of a sensible
asset-level metric for investment management that aims to account for
corporate-level climate performance (whether for risk or impact considerations).
Implications for Scientific Beta Strategies and Analytics
The new requirement for corporates to report Scope 1 and 2 emissions
irrespective of materiality will contribute to further improving the quality of
data that is rightfully at the core of investor climate strategies while
voluntary reporting of Scope 3 emissions, which remain lacking, will bring extra
information on corporate efforts to decarbonise their value chains over time.
The updated TCFD guidance puts the reporting of emissions and emissions
intensity at the top of the list of cross-industry disclosures and considers
that they are indicative of an organisation's exposure and vulnerability to
transition risk. The TCFD (2021a) also regards emissions as "the critical
starting point for any discussion of cross-industry, climate-related metrics"
and as a key input for many other climate-related metrics. Scientific Beta will
continue to anchor its climate strategies on emissions and emissions intensity
while critically assessing progress on alternative climate metrics and analysing
their evolving fitness for impact and risk purposes.
By reaffirming WACI as recommended disclosure for funds, products and
strategies, the TCFD facilitates the continued offering of investment management
strategies that promote real-world decarbonisation by linking capital allocation
and engagement to the traditional economic intensity of companies rather than
their stock market momentum. This is particularly relevant to Scientific Beta's
climate strategies as they take a principled approach to decarbonisation and
alignment that is driven by security-level economic intensity. This also
emboldens investors to join Scientific Beta in exposing the dangers of steering
climate portfolios by financed emissions (see for example: EU's new
carbon-scoring metric bedevils investors, RISK.net, 17 November 2021).
The increased transparency promoted by the TCFD with respect to transition plans
and related metrics (including current/targeted performance along the
cross-industry metric categories) will contribute to improving the availability
and quality of information of relevance to the incorporation of alignment
considerations into climate-impact and climate-risk aware portfolio
construction; this will facilitate the multi-dimensional assessment of
corporate-level alignment and alignment trajectory that is at the heart of
net-zero investor frameworks and the Scientific Beta Climate Impact Consistent
Indices.
As for analytics, Scientific Beta has been providing complimentary transparency
on the full set of carbon footprinting and exposure metrics mentioned by the
TCFD since 2018 as well as multiple metrics falling under the new cross-industry
categories. Reporting along the latter categories will evolve along with the
progress of data and methodologies. Coverage of financed emissions was initiated
in compliance with the EU Benchmark Regulation in 2020. Disclosure of index
alignment with temperature scenarios will be effective shortly.
* * • Blood, D. and C. Powis, 2021, Measuring Portfolio Alignment: Technical
Supplement, Task Force on Climate-related Financial Disclosures, June 2021,
available at:
https://assets.bbhub.io/company/sites/60/2021/05/2021-TCFD-Portfolio_Alignment_Technical_Supplement.pdf.
* • Ducoulombier, F., 2021, Understanding the Importance of Scope 3 Emissions
and the Implications of Data Limitations, The Journal of Impact & ESG
Investing, Summer 2021, Volume 1, Issue 4, pp. 63–71, available at:
https://eprints.pm-research.com/17511/55152/index.html?84641.
* • Ducoulombier, F. and V. Liu, 2021, Carbon intensity bumps on the way to
net zero, The Journal of Impact & ESG Investing, Spring 2021, Volume 1,
Issue 3, pp. 59–73, available at:
https://eprints.pm-research.com/17511/51361/index.html?53073.
* • PCAF, 2020, The Global GHG Accounting and Reporting Standard for the
Financial Industry, Partnership for Carbon Accounting Financials, 18
November 2020, available at:
https://carbonaccountingfinancials.com/files/downloads/PCAF-Global-GHG-Standard.pdf.
* • Raynaud, J., S. Voisin, P. Tankov, A. Hilke, and A. Pauthier, 2020, The
Alignment Cookbook – A Technical Review of Methodologies Assessing a
Portfolio’s Alignment with Low-Carbon Trajectories or Temperature Goal,
Institute Louis Bachelier, July 2020, available at:
https://www.louisbachelier.org/wp-content/uploads/2020/10/cookbook.pdf.
* • TCFD, 2017a, Final Report: Recommendations of the Task Force on
Climate-related Financial Disclosures, Task Force on Climate-related
Financial Disclosures, June 29, 2017, available at:
https://assets.bbhub.io/company/sites/60/2020/10/FINAL-2017-TCFD-Report-11052018.pdf.
* • TCFD, 2017b, Implementing the Recommendations of the Task Force on
Climate-related Financial Disclosures, Task Force on Climate-related
Financial Disclosures, June 29, 2017, available at:
https://assets.bbhub.io/company/sites/60/2020/10/FINAL-TCFD-Annex-Amended-121517.pdf.
* • TCFD, 2021a, Proposed Guidance on Climate-related Metrics, Targets, and
Transition Plans, Task Force on Climate-related Financial Disclosures, June
2021, available at:
https://assets.bbhub.io/company/sites/60/2021/05/2021-TCFD-Metrics_Targets_Guidance.pdf.
* • TCFD, 2021b, Metrics, Targets, and Transition Plans Consultation -Summary
of Responses, Task Force on Climate-related Financial Disclosures, October
2021, available at:
https://assets.bbhub.io/company/sites/60/2021/10/October_2021_Metrics_Targets_and_Transition_Plans_Consultation_Summary_of_Responses.pdf.
* • TCFD, 2021c, 2021 Status Report, Task Force on Climate-related Financial
Disclosures, October 14, 2021, available at:
https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Status_Report.pdf.
* • TCFD, 2021d, Guidance on Metrics, Targets, and Transition Plans, Task
Force on Climate-related Financial Disclosures, October 14, 2021, available
at:
https://assets.bbhub.io/company/sites/60/2021/07/2021-Metrics_Targets_Guidance-1.pdf.
* • TCFD, 2021e, Implementing the Recommendations of the Task Force on
Climate-related Financial Disclosures (2021 annex), Task Force on
Climate-related Financial Disclosures, 14 October 2021, available at:
https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Implementing_Guidance.pdf.
TCFD Recommendations and 2021 Guidance, Scientific Beta overview, November 2021
INTERVIEW
Frédéric Ducoulombier, ESG Director, Scientific Beta, Co-Chair, EDHEC Business
School / Scientific Beta Advanced Climate Investing Research Chair
THE FUTURE OF CLIMATE-RELATED DISCLOSURES AND IMPLICATIONS FOR ALIGNMENT
STRATEGIES – AN INTERVIEW WITH FRÉDÉRIC DUCOULOMBIER, CAIA, ESG DIRECTOR AND
CO-CHAIR, EDHEC BUSINESS SCHOOL / SCIENTIFIC BETA ADVANCED CLIMATE INVESTING
RESEARCH CHAIR
Two of the most significative developments of relevance for climate-related
disclosures in recent months are the update of the implementation guidance of
the Task Force on Climate-related Financial Disclosure (TCFD) recommendations in
October and the entry into force, on 1 January 2022, of the most ambitious
sustainable investment taxonomy regulation to date. We discuss implications for
portfolio construction with Scientific Beta ESG Director Frédéric Ducoulombier.
Scientific Beta released a detailed overview of the updated TCFD guidance and
recommendations (Overview: TCFD Recommendations and 2021 Guidance), which is
summarised in this newsletter. Could you give us the context of this updated
guidance?
There has been considerable growth in the number of listed companies supporting
the TCFD framework and significant progress in the breadth of adoption of its
recommendations. However, quality and consistency of climate-related financial
disclosures remain insufficient, including amongst large, listed companies. The
latest status report published by the TCFD (2021a) shows that disclosures on the
pillars of Governance and Risk Management lag overall; and that while companies
are particularly likely to discuss climate-related risks and opportunities under
the Strategy pillar, decision-relevant information about the financial impact of
climate change and climate change response is insufficient). Metrics and Targets
is the pillar with the highest average level of disclosures across
recommendations but whereas a boom in the disclosure of targets is observed,
progress in disclosure of greenhouse gas emissions and other metrics has slowed
down.
Estimating the financial impact of climate-change related issues is complex for
corporates as it requires meeting organisational, data and modelling challenges.
Unsurprisingly however, institutional investors, bankers and insurers are
particularly interested in understanding the actual and potential financial
impact of climate-related issues on their investees, borrowers and clients (and
in turn, financial stability authorities need to be in a position to assess the
climate-related risks faced by financial institutions). Specifics of transition
plans and their implementation, up to capital expenditure, are also of the
essence for any party trying to assess whether a corporate is "walking the talk"
on its transition pledges.
It is the founding purpose of the TCFD to help identify the information needed
by financial market participants to "appropriately assess and price
climate-related risks and opportunities" and to put forward related
recommendations for "consistent climate-related financial disclosures" (TFCD,
2017).
In this context, the new reference documents released by the TCFD (2021c, 2021d)
are meant to help address some of the challenges related to the assessment and
disclosure of financial impacts, including through improved transparency on
transition plans and increased breadth and improved consistency of reported
metrics and targets. The work has been informed by serious practitioner research
as well as surveys of disclosure preparers and users; Scientific Beta
participated in the latter and contributed research-based feedback on draft
recommendations. We find that the finalised guidance strikes the right balance
between the urgent necessity to raise the bar on disclosures and the reality of
data and modelling limitations. In this regard, it is important to keep in mind
that the expectations for precise and granular data on the impact of climate
change on financial risks far outstretch what the best climate and economic
science can currently deliver.1
How do these TCFD updates promote better disclosure of climate-related risks and
opportunities by corporates?
The updated recommendations invite companies to disclose the potential financial
impact of climate-related issues under different climate scenarios and require a
description of transition plans. Suggested plan disclosures include targets as
well as changes to operations and value chains. The updated guidance includes
advice for the development of effective transition plans with key considerations
to be addressed across the four pillars.
To promote consistency, the updated recommendations introduce a requirement to
disclose metrics and targets under seven identified categories: (i) greenhouse
gas emissions; (ii) transition risks; (iii) physical risks; (iv) climate-related
opportunities; (v) capital deployment; (vi) internal carbon prices and (vii)
remuneration. The update also introduces a requirement to disclose interim
targets when medium- or long-term targets are disclosed.
Companies respecting the TCFD recommendations and disclosing relevant metrics
and targets under these categories would greatly facilitate the assessment of
transition plans by institutional investors. Indeed, they would furnish spot-on
data for evaluating performance against all six of the core asset-alignment
criteria – plus two out of the four other alignment criteria identified by the
Paris Aligned Investment Initiative (PAII, 2021).
As part of these metrics, Scope 1 and Scope 2 emissions are to be disclosed
irrespective of materiality. The TCFD rightly considers that emissions and
emissions intensity are key to understanding an organisation's exposure and
vulnerability to transition risks and is keenly aware that they serve as input
for many metrics. Preparers can rely on tested and trusted methodologies to
produce decision-useful emissions disclosures. Indeed, global standards that
allow for comparability of Scope 1 and Scope 2 emissions across companies have
existed for over twenty years.2 Scope 1 and 2 emissions are by far the most
frequently estimated and reported of the cross-industry metrics and the focal
point of corporate targets; they are also viewed as the most useful disclosures
by users. Users are also very keen on Scope 3 emissions, but the latter remain
challenging for preparers to measure and report.
The context is different for the other metrics: there are no established
standards; preparers have less familiarity with their computation, face issues
with access to data and selection of methodologies, and are reluctant to
voluntary disclose their estimates – this is particularly marked for physical
and transition risks and financial impact.3
The updated recommendations and guidance do contribute to broader adoption and
higher comparability of disclosures linked to current and forward-looking
climate performance. They help preparers with transition planning and users with
assessment of transition alignment status and direction.
However, one should remember that reporting entities may choose to engage in
'strategic' or 'opportunistic' disclosure, especially when disclosures are
voluntary. Within reporting entities, full transparency may be challenged on the
basis of legal and competitive concerns – caution is required when disclosing
quantitative estimates made so uncertain by issues of data reliability, model
risk, and subjective assumptions – it is also understandable that companies
weigh the benefits of leading by disclosures against the consequences of their
strategic exploitation by competitors. In this regard, recent academic research
suggests that companies "cherry pick" their TCFD disclosures "to report
primarily non-material climate risk information" (Bingler, Kraus, and Leippold,
2021). Institutional investors should engage issuers to fully integrate TCFD
recommendations into their statutory financial reporting and should also
advocate for mandatory TCFD reporting.4
Hence the consistency of disclosures will improve as more jurisdictions align
their reporting requirements with the recommendations of the TCFD.5 Naturally,
new disclosures will need to be phased in and enforcement actions may be
required to bring all companies up to speed.
Thanks to investor pressure and regulatory changes, we should see a pick-up in
the growth of companies reporting emissions and rapid progress on disclosures
pertaining to capital deployment. The implementation of environmental taxonomy
and sustainability disclosure regulations will accelerate disclosures of
climate-related opportunities and remuneration. As for disclosures of explicit
estimates of climate risks and financial impacts, they should continue to lag.
Note that the TCFD has refrained from providing precise definitions of
cross-industry metrics. While this is meant to promote their broad adoption,
this creates room for divergent implementations that reduce the relevance of
disclosures. I am confident however that this will be suitably addressed by the
forthcoming IFRS Sustainability Disclosure Standards and that
cross-jurisdictional dialogue will contribute to convergence between
environmental taxonomies.
The TCFD was established out of concern for the financial stability implications
of climate change; does the updated guidance modify reporting by financial
institutions?
The changes I have described apply across all reporting entities. The TCFD
however is aware that metric problems are compounded for financial institutions
as they need to work with sparse and non-standardised reporting by corporates
and may encounter specific challenges with aggregating data to the portfolio
level. In particular, the TCFD acknowledges issues with financial impact and
climate risk exposure metrics and suggests that financial institutions disclose
qualitative and quantitative information, when available.
This notwithstanding, the updated guidance introduces a requirement for
financial institutions to disclose the extent to which their assets and, where
relevant, their investment products, align with a temperature scenario
consistent with the objective of the Paris Agreement. For this exercise,
preparers may use the approach and metric(s) that best suit their circumstances.
After considering industry feedback, the TCFD has walked back from its proposal
to require the incorporation of forward-looking alignment metrics into
target-setting frameworks and management processes.
What are these alignment tools and what is your view of that decision?
The TCFD is to be commended for taking an evidence-based stance on this issue.
There is understandable demand for reducing a complex question – here alignment
– to a single metric, but portfolio alignment tools are still in their infancy
and mandating their use for steering portfolios would have created significant
risks for the financial sector and the promotion of transition itself, as
honestly acknowledged in the report of the Portfolio Alignment Team commissioned
by the TCFD (Blood and Povis, 2021).
The issue arises because alignment tools have different objectives, make
different methodological choices and assumptions, and use different data and
models of sometimes questionable accuracy or relevance. It should be no surprise
that they have been found to lack robustness and produce divergent estimates of
alignment.
If you wish to go beyond tracking the temperature scenario alignment commitments
of companies, such as those validated by the Science Based Targets initiative,
then the approach to developing a temperature alignment metric for companies
involves three steps: (i) selecting macro transition scenarios such as those
used by the Intergovernmental Panel on Climate Change; (ii) identifying
scenario-consistent transition pathways for each relevant sector; and (iii)
measuring the distance between the estimated climate performance of a company
and the relevant pathway(s) – this distance may be expressed in relation to a
sector-specific carbon budget allotted to the firm or relative to a
technological benchmark, and it may then be converted into an implied
temperature rise metric. Once a metric is available at the level of each firm,
aggregation to the portfolio level may be tempted. Uncertainties and options
abound at every step.
Mandating the disclosure of portfolio alignment scores that diverge based on the
choice of provider and assumptions does little to facilitate comparisons across
portfolios and exposes institutions and investors to accusations of
greenwashing. More importantly, the use of divergent indicators for portfolio
construction and engagement undermines investor impact channels by diluting the
potential cost of capital and market signals of capital allocation and the
capacity to productively engage firms around clear and consistent targets shared
by corporates and investors.
Scientific Beta considers that temperature scores may be used as one of several
proxies for reporting on alignment but that further progress will be required
before these tools can play a significant role in allocation and engagement,
notably in terms of firm-level climate disclosures, availability of
science-based temperature scenarios and methodological standardisation. While
this will not happen overnight, the TCFD is contributing to the development of
robust and convergent portfolio alignment tools by promoting more consistent and
comprehensive disclosures and by contributing to a dialogue on best design
practices and suggesting directions for progress of the infrastructure of
climate finance. We note that requiring that any temperature scenario alignment
disclosure include a benchmark assessment performed as per a standardised set of
assumptions would materially improve the comparability of disclosures.
How are alignment considerations woven into the Scientific Beta Climate Impact
Consistent Indices?
The unique value proposition of CICI is to determine constituent weighting
according to climate performance so as to promote and reward real-world climate
action at the company level through portfolio allocation.
The anchor alignment criterion for weighting is sector-relative emissions
intensity performance – we focus on Scope 1 and Scope 2 emissions to best
approach corporate performance6 and rely on revenues to link emissions to the
economic output of the activity.7 At the level of the portfolio, we ensure that
the year-on-year compression of Scope 1 to 3 emissions is at least in line with
the decarbonisation trajectory imposed upon EU Paris-aligned Benchmarks.
The other alignment criteria used are decarbonisation targets – we consider only
emissions reduction targets validated by the Science-based Target initiative
(including net-zero targets from June 2022); the extent and quality of emissions
disclosure; and the proportion of green revenues (with differentiation of EU
Taxonomy aligned revenues from June 2022). Progress in disclosure of transition
plans and associated capital expenditures will allow us to integrate additional
corporate-level alignment criteria and to increase the consideration given to
forward-looking data relative to data representative of current climate
performance.
Why is Scientific Beta introducing consideration of EU Taxonomy data into its
Climate Impact Consistent Indices?
Even within coherent sectors, the contribution of companies to the fight against
climate change goes beyond the control of their emissions. This is something
that the CIC Indices have recognised since inception by tilting constituent
weights in relation to corporate revenues from activities that have a positive
impact on climate change mitigation and adaptation.
Aligning with the EU Taxonomy allows us to rely on standardised and granular
definitions of sustainable activities, distinguish activities whose technical
performance is consistent with the climate mitigation and adaptation goals of
the Paris Agreement, recognise different types of substantial contributions to
the fight against climate change, and more precisely identify activities that
make positive climate contributions but may significantly harm other
environmental objectives – such as the sustainable use of water or the
protection of biodiversity and ecosystems.
Whether for index construction or reporting, the use of a transparent and
commonly accepted reference in lieu of a data-provider classification
facilitates consolidated reporting on sustainable investment by our clients and
enhances beneficiary or end-investor confidence in the strategy's climate
credentials.
With more corporates reporting on their taxonomy-eligible and taxonomy-aligned
activities over time, whether in application of regulatory requirements (which
ramp up to full application by corporates by the end of 2023 for climate change)
or to cater to investor demand, the share of reported vs. estimated data will
grow quickly and the quality of the estimated data will improve. And while the
data currently available concerns only revenues from sustainable activities
under the EU Taxonomy, they will be complemented with related capital and
operating expenditure as corporate reporting progresses.
* * 1Recent academic research (Fiedler et alia, 2021) considers that the demand
for integration of climate science into financial risk assessment and
disclosure "has leap-frogged the current capabilities of climate science
and climate models by at least a decade" and that "The rules by which
climate science can be used appropriately to inform assessments of how
climate change will impact financial risk have not yet been developed." The
authors warn against the material risk of unintended and counterproductive
usages of climate risk analytics in the context of financial
decision-making.
* 2The 2011 corporate value chain standard provides companies with multiple
options for Scope 3 emissions accounting as it is primarily intended as a
tool to help these track their emissions over time. On the limitations of
Scope 3 emissions accounting in a cross-sectional perspective, refer to our
published research titled: Understanding the Importance of Scope 3
Emissions and the Implications of Data Limitations.
* 3These observations are confirmed by preparer feedback collected by the
TCFD (2021b).
* 4Fittingly, the two main net-zero investment frameworks for asset owners
identify this priority of engagement and advocacy activity.
* 5Jurisdictions that have aligned, or announced they would align, reporting
obligations with TCFD recommendations include the European Union, Japan,
the United Kingdom, Brazil, Switzerland, Singapore, Hong Kong and most
recently New Zealand; the US is expected to follow suit shortly and with it
many countries this year.
* 6The available Scope 3 data remain unfit for this exercise as the value
chain reporting standard is not intended to support cross-company
comparisons and modelled data typically take insufficient consideration of
corporate circumstances (Ducoulombier, 2021a).
* 7We eschew enterprise value to avoid introducing capital market biases and
volatility; our intention is to link allocation to climate rather than
stock-market performance (Ducoulombier and Liu, 2021).
* * • Bingler, J. A., M. Kraus, and M. Leippold, 2021, Cheap Talk and
Cherry-Picking: What ClimateBert has to say on Corporate Climate Risk
Disclosures, Working Paper, available at SSRN:
https://ssrn.com/abstract=3796152 or
http://dx.doi.org/10.2139/ssrn.3796152.
* • Blood, D. and C. Powis, 2021, Measuring Portfolio Alignment: Technical
Supplement, Task Force on Climate-related Financial Disclosures, June 2021,
available at:
https://assets.bbhub.io/company/sites/60/2021/05/2021-TCFD-Portfolio_Alignment_Technical_Supplement.pdf.
* • Ducoulombier, F., 2021a, Understanding the Importance of Scope 3
Emissions and the Implications of Data Limitations, The Journal of Impact &
ESG Investing, Summer 2021, Volume 1, Issue 4, pp. 63–71, available at:
https://eprints.pm-research.com/17511/55152/index.html?84641.
* • Ducoulombier, F., 2021b, TCFD Recommendations and 2021 Guidance, Overview
Paper, Scientific Beta, November 2021, available at:
https://www.scientificbeta.com/factor/download/file/tcfd-recommendations-and-2021-guidance.
* • Ducoulombier, F. and V. Liu, 2021, Carbon intensity bumps on the way to
net zero, The Journal of Impact & ESG Investing, Spring 2021, Volume 1,
Issue 3, pp. 59–73, available at:
https://eprints.pm-research.com/17511/51361/index.html?53073.
* • Fiedler, T., A.J. Pitman, K. Mackenzie, N. Wood, C. Jakob, and S. E.
Perkins-Kirkpatrick, Business risk and the emergence of climate analytics,
Nature Climate Change, Volume 11, pp. 87–94, 2021, available at:
https://doi.org/10.1038/s41558-020-00984-6.
* • PAII (2021), Net Zero Investment Framework: Implementation Guide, Paris
Aligned Investment Initiative (The Institutional Investors Group on Climate
Change, Ceres, Asia Investor Group on Climate Change, Investor Group on
Climate Change), available at:
https://www.iigcc.org/download/net-zero-investment-framework-implementation-guide/?wpdmdl=4425&refresh=60f8caa79150a1626917543.
* • TCFD, 2017, Final Report: Recommendations of the Task Force on
Climate-related Financial Disclosures, Task Force on Climate-related
Financial Disclosures, June 29, 2017, available at:
https://assets.bbhub.io/company/sites/60/2020/10/FINAL-2017-TCFD-Report-11052018.pdf.
* • TCFD, 2021a, 2021 Status Report, Task Force on Climate-related Financial
Disclosures, October 14, 2021, available at:
https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Status_Report.pdf.
* • TCFD, 2021b, Metrics, Targets, and Transition Plans Consultation -
Summary of Responses, Task Force on Climate-related Financial Disclosures,
October 2021, available at:
https://assets.bbhub.io/company/sites/60/2021/10/October_2021_Metrics_Targets_and_Transition_Plans_Consultation_Summary_of_Responses.pdf.
* • TCFD, 2021c, Guidance on Metrics, Targets, and Transition Plans, Task
Force on Climate-related Financial Disclosures, October 14, 2021, available
at:
https://assets.bbhub.io/company/sites/60/2021/07/2021-Metrics_Targets_Guidance-1.pdf.
* • TCFD, 2021d, Implementing the Recommendations of the Task Force on
Climate-related Financial Disclosures (2021 annex), Task Force on
Climate-related Financial Disclosures, 14 October 2021, available at:
https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Implementing_Guidance.pdf.
--------------------------------------------------------------------------------
Frédéric Ducoulombier is ESG Director at Scientific Beta. From 2015 to 2019, he
was in charge of risk and compliance for Scientific Beta having previously
served EDHEC Business School's risk and investment management research centre
for ten years as the founding director of EDHEC Risk Institute's executive
education arm and of EDHEC Risk Institute–Asia. At EDHEC Business School, he
also taught economics and finance, managed graduate programmes and served as
Deputy Associate Dean of Graduate Studies and Deputy Associate Dean of Research
and Development. His research and advocacy work has focused on the purported
risks of exchange traded funds, the governance and transparency of financial
indices, non-financial risks in the fund management industry, smart beta and
factor investing and the integration of environmental, social and governance
criteria into investment. He was a member of the Consultative Working Group of
the European Securities Markets Authority's Financial Innovation Standing
Committee from February 2015 to January 2017. He holds a master's in management
from IESEG School of Management, a graduate certificate in East Asian Studies
from a University of Montréal/McGill University program, and is a Chartered
Alternative Investment Analyst® designee.
PUBLICATIONS
Documents authored by Scientific Beta featuring its latest research.
WHITE PAPERS
In a concern for transparency, and as part of its aim to help investors to
understand and to invest in smart factor and ESG/Climate indices, Scientific
Beta has published a large number of white papers that are available on the
Scientific Beta platform.
Featured White Papers
Scientific Beta Enhanced ESG Reporting – Supporting Incorporation of ESG Norms
and Climate Change Issues in Investment Management
November 2021
Incorporating Environmental, Social and Governance (ESG) dimensions into
investment analysis and decision-making is a growing norm due to higher
regulatory and voluntary reporting needs, as well as investors' efforts to
account for the financial risk and performance impacts of ESG considerations.
Scientific Beta recognises the growing diversity of investor motivations for ESG
incorporation, and its Climate Impact Consistent Indices, ESG and Low Carbon
Fiduciary Options for multi-factor indices, as well as its Enhanced ESG
Reporting are designed to serve the needs of both ethical and socially
responsible investors and business-case ESG investors. These ESG/Climate indices
and reporting tools extend the two hallmarks of Scientific Beta's offering into
the ESG space, namely providing full transparency on its indices' financial
risks and performance and maintaining fiduciary options to control
non-diversifiable risks.
This paper focusses on Scientific Beta's Enhanced ESG Reporting framework, which
covers ESG Norms, Climate Transition Risks, Climate Change and Greenwashing. The
ESG Norms, Climate Transition Risks and Climate Change analytics are offered on
a complimentary basis for all indices offered, while the Greenwashing analytic
is complimentary for ESG/Climate indices. The Enhanced ESG Reporting is relevant
to investors whose ESG objectives or constraints may include:
* Dissociating from companies involved in controversial products and conducts;
* Incentivising the respect of global norms and/or the transition to a
low-carbon economy;
* Improving investment resilience to climate change;
* Shunning investments that could create reputational and liability risks;
* Altering the portfolio's expected risk/return profile based on financially
material ESG considerations.
The ESG Norms analytics cover exposure to ethical norms violations,
controversies, issuance of only non-voting shares, and product-based violations
on tobacco and controversial weapons. Meanwhile, an extensive range of carbon
metrics are provided in the Climate Transition Risks analytics, which provide
insights on asset stranding risks and the impact of the transition to a
low-carbon economy. These analytics include exposure to carbon-related assets,
exposure to fossil-fuel sub-sectors, reserved emissions, power generation
capacity from green and brown sources, and weighted average carbon intensity
(WACI) decomposition, which breaks down a portfolio's relative WACI into sector
and stock allocation effects. Additional metrics on the relevant carbon
intensity, decarbonisation, and activity constraints for indices designed to
comply with the European Union (EU) Climate Transition Benchmark (CTB) or Paris
Aligned Benchmark (PAB) regulations are also provided in the Climate Transition
Risks analytics. Besides Climate Transition risks, a separate set of analytics
on Climate Change is also included, highlighting carbon-footprinting metrics,
which reflect emissions attributable to the portfolio, and exposure to physical
risks of climate change. Finally, to better understand greenwashing risks, a set
of Greenwashing analytics is included for ESG/Climate indices to focus on
inconsistent stock-level signalling in relation to companies' carbon
performance.
The comprehensive range of analytics provided is aligned with widely accepted
standards in ESG reporting, including responsible investment initiatives such as
the Principles for Responsible Investment and global consensus-based norms such
as the United Nations Global Compact (UN Global Compact). A specific report
covering ESG metrics in the EU Benchmarks Regulation (BMR) is also available in
a downloadable format. In addition, all the carbon metrics highlighted in the
Task Force on Climate-Related Financial Disclosures (TCFD) guidelines are
covered in the analytics.
--------------------------------------------------------------------------------
Assessing the Robustness of Smart Beta Strategies
December 2021
There is significant evidence that systematic equity investment strategies
(so-called smart beta) outperform cap-weighted benchmarks in the long run.
However, it is important to recognise that performance analysis is typically
conducted using backtests that apply the methodology to historical returns.
Concerning actual investment decisions, it is therefore important to question
how robust any outperformance is. The paper makes a distinction between relative
robustness and absolute robustness.
A strategy is assumed to be 'relatively robust' if it is able to deliver similar
outperformance under similar market conditions by aligning well with the
performance of underlying factor exposure it is seeking and reducing unrewarded
risks.
'Absolute robustness' is the absence of pronounced state and/or time
dependencies. A strategy shown to outperform irrespective of prevailing market
conditions can be termed as robust in absolute terms.
Assessing the robustness of smart beta strategies should play a central role for
investors in their due diligence process. Such strategies often experience an
out-of-sample degradation of their performance compared to that presented in the
historical in-sample period. Investors should always check that interesting
in-sample results are complemented by a consistent construction framework and
transparency on the methodology and implementation from the side of the strategy
provider. They should also be able to measure the robustness directly using
appropriate tools and metrics.
This paper discusses why robustness is relevant for investors in smart beta
strategies and describes the sources of deficiencies. It further explains the
need for robustness checks in performance analysis of such strategies and the
various methods by which Scientific Beta improves robustness. It also discusses
measurements of robustness and the protocol that we employ internally to assess
the robustness of newly developed strategies. This toolkit of tests is quite
relevant to investors and can be used in their evaluation of smart beta
strategies. It is based on an analysis of conditional performance in a
multi-dimensional context (market, volatility, sector, factors, and
macroeconomic variables). It also draws on an evaluation of robust statistical
inference and on out-of-sample robustness tests of the performance and risk of
the indices proposed using long-term data. Finally, the paper applies our
robustness protocol to a set of strategies and evaluates the outcome against
their proposed objectives.
--------------------------------------------------------------------------------
SUPPLEMENTS IN PARTNERSHIP WITH INDUSTRY PUBLICATIONS
EDHEC has established partnerships with a number of industry publications to
produce special editorial supplements providing industry-relevant research of
the highest academic standards.
IPE EDHEC Research Insights
Autumn 2021
The latest Scientific Beta special issue of the EDHEC Research Insights
supplement to Investment & Pensions Europe questions the widespread practice of
using ESG as an alpha signal, examines the issue of detecting greenwashing in
climate investing and looks at how portfolio greenwashing compromises investors'
climate engagement, introduces Scientific Beta's new inflation-friendly equity
indices, discusses how to estimate stock-level exposures to macro-economic
risks, highlights the pitfalls in constructing low carbon equity portfolios,
presents Scientific Beta's series of Climate Impact Consistent (CIC) indices,
and explores how to position equity portfolios for trade policy shifts.
'Honey, I shrunk the ESG alpha'
Our findings question a widespread practice of using ESG as an alpha signal.
While many of the ESG strategies analysed have positive returns, adjusting these
returns for risk shrinks 'alpha' (or excess risk-adjusted return) to zero.
Investors should ask how ESG strategies can help them to achieve objectives
other than alpha, such as aligning investments with their values and norms,
making a positive social impact, and reducing climate or litigation risk.
Doing good or feeling good? Detecting greenwashing in climate investing
We identify greenwashing risks in the construction of portfolios that represent
popular climate strategies, especially those that correspond to net zero
alignment strategies. Across strategies focusing on climate, the climate scores
only account for 12% of differences in weights across stocks. In contrast,
market capitalisation accounts for 88% of the differences in weights in these
strategies.
When you do not put your money where your mouth is. How portfolio greenwashing
compromises investors' climate engagement
Greenwashing is detrimental to the efficacy of engagement. While climate
investing sets out to make an impact by pushing firms to take urgent action to
address the climate emergency, there is a danger that investors end up paying
for 'feel good' products that induce complacency. Likewise, engagement
strategies that are not combined with consistent portfolio decisions could lead
to a false sense of investor action, without leading to a real effect.
Inflation-friendly equity indices. How to protect against rising inflation in
equity portfolios
We look at Scientific Beta's new series of inflation-friendly equity indices,
which protect investors' portfolios against rising inflation and deliver an
equity market risk premium over the long term. These indices are ideal
candidates to replace cap-weighted indices for investors with inflation fears
and as equity components of a multi-asset portfolio that needs insulation
against inflation shocks.
Targeting macroeconomic risks in equity portfolios
We propose a methodology to estimate stock-level exposures to macroeconomic
risks. The success of our methodology relies on the use of appropriate proxies
for a relevant macroeconomic variable and robust measurement tools from
statistics as well as textual analysis. Portfolios constructed with a target of
high or low exposure to our forward-looking macro variables achieve significant
exposures out of sample, which is not the case when using naïve estimation
techniques or backward-looking economic variables, such as realised inflation or
growth.
When greenness is mistaken for alpha. Pitfalls in constructing low carbon equity
portfolios
We present research results that suggest that using low carbon strategies as a
source of alpha is costly to investors. This does not imply that investors
cannot benefit from low carbon investing. Investors should analyse whether or
not low carbon strategies can help them hedge climate risks or make a positive
impact on corporate behaviour.
Scientific Beta Climate Impact Consistent indices
We introduce the Climate Impact Consistent (CIC) indices, which have a unique
design that creates consistency between investors' engagement activities and
investment decisions to maximise the potential for real-world impact. Indeed,
the real impact of investment decisions from a climate alignment perspective
comes from the consistency between these decisions and the climate performance
of the companies that make up the portfolio. This is what is achieved by the CIC
indices, which weight each stock according to its intra-sector climate
performance and alignment trajectory.
War and peace. Positioning equity portfolios for trade policy shifts
Following the rise in trade tensions across the globe in recent years, it has
become more relevant than ever to have access to effective tools to manage
exposure to the risk of shifts in trade policies. We have shown that it is
possible to capture heterogeneity in exposure to trade policy risk among stocks
to construct effective risk management tools. Our methodology allows us to
consider several dimensions of exposure, which improves the robustness of the
resulting trade policy sensitivity.
SCIENTIFIC BETA NEWS
The latest news about Scientific Beta and its activities.
SCIENTIFIC BETA WELCOMES UPDATED TCFD GUIDANCE AND RENEWS CRITICISM OF EU
CLIMATE TRANSITION AND PARIS-ALIGNED BENCHMARK REGULATION
Scientific Beta has reiterated warnings against the use of enterprise-value
based carbon intensity and regards integration of implied temperature rise
metrics into portfolio construction as premature.
On 15 October 2021, the Task Force on Climate-related Financial Disclosures
(TCFD) updated its 2017 guidelines on implementing its recommendations that aim
to promote more informed financial decisions in relation to the risks of climate
change.1
The updated guidance:
* Promotes more granular or explicit disclosure of risks and opportunities
identified by reporting organisations and how these impact their strategies.
* Introduces significant revisions to the disclosures of metrics and targets
to:
- Encourage the uptake of indicators that are relevant across industries and
of related targets
- Require disclosure of Scope 1, Scope 2 and material Scope 3 emissions
- Require the financial sector to disclose its financed emissions and the
extent to which its activities align with the goals of the Paris Agreement.
With respect to the supplemental guidance for the financial sector pertaining to
the Metrics and Targets pillar of the recommendations, Scientific Beta welcomes
two major changes relative to the draft proposals on which the TCFD sought
feedback. First, the TCFD reaffirms Weighted Average Carbon Intensity as
recommended disclosure2 for funds, products and strategies (while also requiring
the disclosure of financed emissions, where possible). Second, it adopts a more
cautious approach in respect of disclosure of alignment with
Paris-Agreement-consistent temperature scenarios.
"The TCFD is to be commended for taking an evidence-based stance on the
evolution of metrics and targets and reversing proposals that would have
provided further incentives to counterproductive action by investors," comments
ESG Director Frédéric Ducoulombier who penned Scientific Beta's contribution to
the TCFD consultation.
"The prudent approach of the TCFD in respect of portfolio alignment is befitting
the lack of maturity and convergence of methodologies in that area and we salute
the work commissioned by the organisation to try and establish bases for the
development of robust and convergent portfolio alignment tools," says
Ducoulombier.
"While there is understandable interest in financed emissions as a potential
carbon footprinting approach for varied financial activities and investments, it
should not be allowed to guide security selection and issuer engagement, notably
because its reliance on enterprise value introduces capital market volatility
into carbon intensity measurement and obscures the relationship to real-world
emissions as we have documented in published research.3 While not perfect,
revenues-based carbon intensity, as endorsed by the TCFD since 2017, is a
superior metric for these applications," he adds.
"The integration of climate considerations into investment management must be
based on robust data and fit-for-purpose metrics and methodologies whether its
primary focus is on managing climate-related risks and opportunities or on
promoting real-world climate change mitigation. The European regulator has erred
in the matter and bears responsibility for the proliferation of greenwashing
strategies claiming EU labels," says Scientific Beta CEO Noël Amenc, who
co-authored a February 2020 report with Ducoulombier that warned of the
unintended consequences of the EU regulation then in the making.4
"It is thus a source of comfort and hope that the TCFD, despite a difficult
political context, chose to revise its guidance in a manner that preserves
established and relevant metrics for climate-related investments, strengthens
the issuer-level disclosures on which they are based, and takes a careful,
multi-pronged, approach to strengthening the bases for the integration of
forward-looking climate-related data in investment management," he adds.
* * 1The TCFD was established by the Financial Stability Board, an
international body that monitors and makes recommendations about the global
financial system. Financial regulators worldwide have endorsed TCFD
recommendations with the European Union, Japan, the United Kingdom, Brazil,
Switzerland, Singapore and Hong Kong having set, or announced they would
set, reporting requirements aligning with the work of the TCFD. The TCFD
recommendations are organized around four pillars: Governance, Strategy,
Risk Management and Metrics and Targets.
* 2The TCFD distinguishes between recommended indicators that financial
institutions "should disclose" and additional carbon exposure and
footprinting metrics that they "should consider" for reporting. Weighted
Average Carbon Intensity (WACI) defined as the average, based on portfolio
weights, of the issuer-level ratios of Scope 1 and Scope 2 greenhouse gas
emissions to revenues was the sole recommended indicator until the October
2021 update (which added financed emissions to be calculated according to
the standards being developed by the Partnership for Carbon Accounting
Financials (PCAF)). The draft guidelines had proposed requiring the
disclosure of "financed emissions in line with PCAF's methodology and WACI,
if relevant (…) with WACI and other carbon footprint metrics (…) remaining
as 'should conside' metrics.'
* 3Carbon Intensity Bumps on the Way to Net Zero, Frédéric Ducoulombier and
Victor Liu, The Journal of Impact & ESG Investing, Spring 2021, Volume 1,
Issue 3, pp. 59–73.
* 4Unsustainable Proposals: A critical appraisal of the TEG Final Report on
climate benchmarks and benchmarks' ESG disclosures and remedial proposals,
Noël Amenc and Frédéric Ducoulombier, Scientific Beta, February 2020.
--------------------------------------------------------------------------------
SCIENTIFIC BETA SURVEY SHOWS THAT MOST INVESTORS DO NOT BELIEVE IN ESG
OUTPERFORMANCE
A survey conducted by Scientific Beta to collect market participants' views on
its recent white paper '"Honey, I Shrunk the ESG Alpha": Risk-Adjusting ESG
Portfolio Returns' received responses from investment professionals with roles
such as portfolio manager, chief investment officer, director of investment
strategy research, head of asset allocation, head of ESG research, ESG analyst
and research analyst. The respondents to this survey come from institutional
investors, asset managers, banks, consultants and wealth managers managing
assets worth USD 3.3 trillion, USD 645 billion, USD 4.1 trillion, USD 179
billion and USD 7.7 billion respectively.
The white paper questions the popular belief that ESG strategies generate
outperformance and shows that the ESG alpha disappears when adjusting for
industry and factor exposures. The results of the survey show that:
* Most of the respondents agree that there is no sound evidence that ESG
strategies offer any incremental value in terms of performance, and that most
of the performance is captured by style factors.
* Only 17% of respondents believe that the finding of absence of outperformance
is surprising.
Dr. Felix Goltz, co-author of the study and Research Director at Scientific
Beta, said, "Our study of ESG performance comes to a clear conclusion: when
using standard risk adjustments in performance measurement, widely cited
findings on positive ESG alpha disappear. Irrespective of performance, however,
a key driver of the adoption of ESG investing is that non-pecuniary and risk
characteristics of their portfolios matter to investors. Rather than turning ESG
investing in another hunting ground for alpha, asset managers should perhaps
take such non-pecuniary and risk objectives seriously. Judging from our survey
respondents, focusing on objectives other than alpha is a credible value
proposition for ESG investing."
"Honey, I Shrunk the ESG Alpha": Reactions of Investment Professionals,
Scientific Beta publication, November 2021
"Honey, I Shrunk the ESG Alpha": Risk-Adjusting ESG Portfolio Returns,
Scientific Beta white paper, April 2021
--------------------------------------------------------------------------------
SCIENTIFIC BETA WINS "BEST SPECIALIST ESG INDEX PROVIDER" CATEGORY AT THE ESG
INVESTING AWARDS 2022
Scientific Beta is pleased to announce that it has been named "Best Specialist
ESG Index Provider" at the ESG Investing Awards 2022, which celebrate excellence
in Environmental, Social and Governance (ESG) research, ratings, funds, and
products.
The award recognises Scientific Beta's provision of a highly innovative index
series that has no equivalent at Scientific Beta's peers: the Climate Impact
Consistent Indices (CICI). The CICI offering is the only pure climate index
offering on the market. Unlike traditional climate indices and benchmarks, which
combine financial and climate criteria, either in the form of tilts applied to
reference cap weights, or of carbon intensity score optimisation under tracking
error constraints, the CIC indices make the weights of stocks depend solely on
their climate performance. This avoids financial considerations contradicting
climate considerations.
The ESG Investing Awards, now in their third year, are judged by an independent
panel of experts from industry and academia. The Awards celebrate the most
impactful products, funds and initiatives that are making a positive
contribution towards the integrity, uptake and success of ESG investing.
Commenting on the award, Noël Amenc, CEO of Scientific Beta, said, "We are
delighted with this major recognition of Scientific Beta and our Climate Impact
Consistent Indices. CICI is positioned for implementing the recommendations of
the Net-Zero investment coalitions at the portfolio-construction level. In
particular, the Paris Aligned Investment Initiative (PAII) Framework states that
one of the key elements of a "Paris aligned stewardship approach" is to develop
an engagement strategy with a feedback loop to portfolio construction. CICI
allows for the practical implementation of this approach where engagement and
portfolio construction are neither mutually exclusive nor independent and
instead are mutually reinforcing."
Matthew Clements, editor of ESG Investing, commented, "This year we have
received nearly double the number of nominations from 2021 and our judges have
been asked to assess finalists of outstanding quality across all categories. We
have also seen a blossoming of new ESG fund types as well as a considerable
expansion in the quantity and scope of ESG research and product offerings. This
is a trend that is set to continue as ESG becomes more embedded in investment
mandates globally, and sustainability issues move to the forefront of investors'
priorities. Many thanks to all our judges and congratulations to our winners and
finalists."
FORTHCOMING EVENTS
Research and education are a core part of Scientific Beta's strategy and we
regularly organise events to contribute to bridging the gap between academia and
industry.
WEBINARS
MACRO-TILTED EQUITY INDICES: PROTECTING YOUR EQUITY PORTFOLIO AGAINST INFLATION
AND OTHER MACRO SURPRISES
9 February, 2022 – 2.00pm EST / 8.00pm CET
For investors seeking exposure to non-rewarded risk factors, such as
macroeconomic factors, Scientific Beta is offering a new suite of macro indices
designed to capture the equity risk premium with additional exposure to
unexpected shocks or the surprises of targeted macro factors.
In this P&I webinar, we will present Scientific Beta's equity inflation indices,
the first in a series of macroeconomic factor indices that provide long-term
equity performance with additional inflation protection compared to a
traditional cap-weighted equity index. Their high liquidity makes them ideal
candidates as a replacement of cap-weighted indices in a multi-asset portfolio.
We will also present equity indices targeting further macro variables (interest
rates, term spread, credit spread).
Topics covered include:
* Reliable measurement of macroeconomic exposure (role of robust statistics and
forward-looking information).
* Building dedicated macroeconomic portfolios that lead to stronger targeted
macro exposures compared to a factor or sector allocation approach.
* The financial characteristics of highly liquid investable inflation indices
that can offer better protection against inflation surprises than a simple
cap-weighted index.
* Beyond inflation: Protecting portfolios against surprises in the interest
rate, term spread, and credit spread.
The webinar will be hosted by Felix Goltz, PhD, Research Director, and Dimitris
Korovilas, PhD, Investment Product Specialist, at Scientific Beta.
To participate in the webinar, please visit the dedicated registration web page.
For further information about this event, please contact Séverine Cibelly at
severine.cibelly@scientificbeta.com.
PAST EVENTS
Recordings of recent webinars broadcast by Scientific Beta.
WHEN GREENNESS IS MISTAKEN FOR ALPHA: PITFALLS IN CONSTRUCTING LOW CARBON EQUITY
PORTFOLIOS
A webinar hosted by Felix Goltz, Research Director, and Mikheil Esakia,
Quantitative Research Analyst, at Scientific Beta, on 9 November, 2021 analysed
how low carbon strategies can be mistaken for alpha and what the consequences
are for investors.
Low carbon investing products are typically built on the assumption that green
stocks produce positive alpha. Economic theory contradicts this assumption: all
else being equal, green firms should earn lower returns than brown firms because
they provide non-pecuniary benefits and risk-hedging benefits to investors. The
empirical literature does not support the claim of positive alpha for low
emission firms either. Our research results suggest that using low carbon
strategies as a source of alpha is costly to investors. This does not imply that
investors cannot benefit from low carbon investing. Investors should analyse
whether low carbon strategies can help them hedge climate risks or make a
positive impact on corporate behaviour.
When Greenness is Mistaken for Alpha: Pitfalls in Constructing Low Carbon Equity
Portfolios, Scientific Beta white paper, May 2021
PRESS REVIEW
A selection of articles published in the international business or specialised
press featuring Scientific Beta and its research.
SCIENTIFIC BETA: HOW TO PROTECT YOUR EQUITY PORTFOLIO AGAINST RISING INFLATION
Financial Investigator (18/01/2022)
By Mikheil Esakia and Felix Goltz, respectively Quantitative Research Analyst
and Research Director at Scientific Beta
"(...) Our research sets out to tackle the challenge of targeting inflation
exposures in a completely systematic and replicable way. In contrast with sector
or style allocation strategies, we propose to build dedicated portfolios from
stock-level information to achieve inflation protection. By exploiting
differences in firm-level exposures to inflation, instead of relying on
pre-existing equity portfolios such as sector indices, we aim to provide more
reliable inflation protection. (...)"
Copyright Financial Investigator Publishers B.V.
--------------------------------------------------------------------------------
EU'S NEW CARBON-SCORING METRIC BEDEVILS INVESTORS
Risk.net (17/11/2021)
"(...) "What you get is a metric driven by the market performance of companies,
as opposed to their climate performance," says Frederic Ducoulombier, ESG
director at Scientific Beta, a provider of quantitative indexes. (...)
Ducoulombier found that nearly a third of companies that improved Evic-based
scores by 7% or more after applying the adjustment had nonetheless increased
emissions. For revenue-scaling, the cadre of firms that improved by this degree
was 18%. (...) But could the problems with using Evic be resolved? Scientific
Beta advocates a return to revenue-scaling for metrics used in portfolio
construction. "It's not perfect, but it's better," says Ducoulombier. (...)"
Copyright Infopro Digital Risk (IP) Limited
--------------------------------------------------------------------------------
SCIENTIFIC BETA SURVEY SHOWS THAT MOST INVESTORS DO NOT BELIEVE IN ESG
OUTPERFORMANCE
Institutional Asset Manager (09/11/2021)
"(...) A survey conducted by Scientific Beta to collect market participants'
views on its recent white paper '"Honey, I Shrunk the ESG Alpha": Risk-Adjusting
ESG Portfolio Returns' received responses from investment professionals with
roles such as portfolio manager, chief investment officer, director of
investment strategy research, head of asset allocation, head of ESG research,
ESG analyst and research analyst. (...) The results of the survey show that:
Most of the respondents agree that there is no sound evidence that ESG
strategies offer any incremental value in terms of performance, and that most of
the performance is captured by style factors; Only 17 per cent of respondents
believe that the finding of absence of outperformance is surprising.(...)"
Copyright Institutional Asset Manager
On the same subject:
• Most Investors Do Not Believe In ESG Outperformance, Advisor Magazine,
09/11/2021
• ESG Outperformance Belief Challenged, Benefits and Pensions Monitor,
11/11/2021
--------------------------------------------------------------------------------
ESG METRICS TRIP UP FACTOR INVESTORS
Financial Times (01/11/2021)
"(...) The first difficulty with using ESG performance scores in this way,
according to Felix Goltz — an academic and research director at Scientific Beta,
a data provider — is that there is confusion over the purpose. "The starting
point in the industry is that people believe ESG is a source of outperformance
and, if it was [using the data in the same way as a factor-based approach], it
would be a logical approach to follow," he says. However, research has shown
that the correlation between a high ESG metric and outperformance declines over
time, he points out. (...) Goltz maintains, however, that while "the trend is
definitely to use ESG scores and try to use them alongside other factor
considerations", it was not appropriate to do so. "Most, in fact, use the ESG
score as a factor even though there is no evidence that it is a factor," he
says. He says using ESG scores is easy, but it should be a separate
consideration. (...)"
Copyright Financial Times
On the same subject:
• ESG as insurance, not for short-term alpha, The Business Times, 04/08/2021
• Does it pay to steer clear of sin stocks?, FTfm, 18/10/2021
• Wild West of ESG blurs solid sustainable investment funds and 'greenwashing',
Financial Planning, 11/11/2021
• Can trustees be socially responsible?, FT Adviser 07/12/2021
• Top ESG funds mimic S&P 500 while investors are stuck paying a premium
(video), CNBC, 14/01/2022
--------------------------------------------------------------------------------
CLIMATE CHANGE ETFS FOUND TO BE UNDERMINING WAR ON GLOBAL WARMING
Financial Times (20/09/2021)
"(...) Climate-focused investment funds are undermining the fight against global
warming by routinely engaging in greenwashing, academic research has claimed.
Passive exchange traded funds tracking "low carbon", "climate change" or
"Paris-aligned" indices allocate little of their money to the greenest companies
and habitually increase the weighting of companies whose environmental
performance is deteriorating. Worse still, these ETFs starve sectors at the
heart of the transition to a cleaner economy of capital, claims Doing Good or
Feeling Good? Detecting Greenwashing in Climate Investing, a paper from Edhec, a
French business school and think-tank. "Since considerable investment is
necessary to ensure electrification of the economy and decarbonisation of
electricity, underfunding of this sector in climate-aligned benchmarks, which
can correspond to a reduction in capital allocation of up to 91 per cent, would
constitute the most dangerous form of portfolio greenwashing," said Felix Goltz,
co-author of the paper. The key issue is not how to restrict investment in these
industries, but rather, how to make sure that these industries invest in
technology that allows them to produce needed goods and services with minimum
release of greenhouse gases," he argued. (...)"
Copyright Financial Times
On the same subject:
• How Wall Street Is Gaming ESG Scores, Bloomberg, 08/09/2021
• Researchers float 50% threshold for 'genuine climate strategy', IPE,
22/09/2021
• Sustainable ETFs not so sustainable, Money Management, 22/09/2021
• Climate ETFs do little to decarbonise the economy, report finds, ETF Stream,
22/09/2021
• Ideas Farm: ESGet out of here!, Investors' Chronicle, 23/09/2021
• Climate Investing Strategies Do Not Live Up To Promise, Benefits and Pensions
Monitor, 23/09/2021
• Green investing: How your savings can fight climate change, BBC News,
28/09/2021
• ESG Whistleblower Calls Out Wall Street Greenwashing, Bloomberg, 02/10/2021
• How investment funds' "greenwashing" hurts the planet, MoneyWeek, 02/10/2021
• ESG in pills, Oxford Business Review, 02/10/2021
• Greenwashing by major polluters and investors inflicting "mass destruction",
Investors' Chronicle, 04/10/2021
• ESG investment and greenwashing: Myth and reality, The Business Times,
06/10/2021
• Why ESG funds are oblivious to net-zero transition plans, Capital Monitor,
20/10/2021
• 'Greenwashing' or genuine?: Behind big business' climate promises, France 24,
02/11/2021
--------------------------------------------------------------------------------
FIGHTING CLIMATE CHANGE IN ASIA: AN EXCHANGE-LED APPROACH
World Federation of Exchanges (August 2021)
"(...) Our subsidiary, Scientific Beta, launched a unique series of Climate
Impact Consistent Indices (CICI) in April 2021. Designed to implement the
recommendations of net-zero investment coalitions at the portfolio-construction
level, CICI is the only pure climate index offering on the market to help make
investment decisions and engagement practices consistent, in order to maximise
their impact. (...)"
Copyright Copyright WFE - The World Federation of Exchanges
RECRUITMENT
Selected positions currently available at Scientific Beta.
As part of its international development programme and in order to strengthen
its index development activity, Scientific Beta regularly recruits for positions
in its global offices. To apply, please send your CV and a cover letter to
recruitment@scientificbeta.com.
* Salaries are determined according to the Scientific Beta pay scale, based on
qualifications and prior experience.
* Written and spoken English is essential.
For more information about Scientific Beta, please visit our website and our
corporate YouTube channel.
--------------------------------------------------------------------------------
SENIOR PRODUCT SPECIALIST, QUANTITATIVE INVESTMENT SOLUTIONS (LONDON)
In order to strengthen its client-facing Product Specialist team in London,
Scientific Beta is recruiting a Senior Product Specialist, Quantitative
Investment Solutions.
The successful candidate will be a senior member of the Product Specialist team
within Business Development, reporting directly to the Global Head of Sales and
Client Services.
The candidate will be required to work independently in a small team, showing
initiative to support clients and prospects in a product specialist capacity
with the goal of helping to win new business in partnership with the Business
Development Managers.
The candidate will be required to present the company's products in finals
presentations, client meetings, webinars and international conferences and needs
to demonstrate previous significant experience in these roles at a senior level
within a financial institution. The company’s current product list includes
single factor and multi-factor indices, macroeconomic factor equity indices, low
carbon and ESG indices and retirement bonds.
The position requires the candidate to work closely with the research
department, index management team, marketing and the regional business
development managers.
The candidate needs to have a quantitative educational background to DPhil/ PhD
level preferably on a finance topic. Given the seniority of the role, the
candidate should have at least 15 years of professional investment related
experience.
The candidate needs to be a clear communicator of academic literature and
complex quantitative and ESG/climate related concepts in a concise and
structured manner. The role requires the candidate to prepare presentations,
contribute to the monthly newsletter and client reports.
The position is based in London but the person will cover existing and potential
asset owner and asset manager clients based mainly in Europe and North America
but will be required to travel to Asia occasionally as well.
ABOUT US
Corporate brochure
SCIENTIFIC BETA
Scientific Beta aims to encourage the entire investment industry to adopt the
latest advances in smart factor and ESG/Climate index design and implementation.
Established in December 2012 by EDHEC-Risk Institute, one of the top academic
institutions in the field of fundamental and applied research for the investment
industry, as part of its mission to transfer academic know-how to the financial
industry, Scientific Beta shares the same concern for scientific rigour and
veracity, which it applies to all the services that it provides to investors and
asset managers. We offer the smart factor and ESG/Climate solutions that are
most proven scientifically, with full transparency of both methods and
associated risks.
On January 31, 2020, Singapore Exchange (SGX) acquired a majority stake in
Scientific Beta. SGX is maintaining the strong collaboration with EDHEC Business
School, and principles of independent, empirical-based academic research, that
have benefited Scientific Beta's development to date.
Scientific Beta has developed two types of expertise over the years
corresponding to two major concerns for investors:
* Expertise in the area of Smart Beta, and more particularly factor investing
* Expertise in the area of ESG, and particularly Climate investing
To date, Scientific Beta is offering two major types of climates objectives:
Since 2015, offerings with financial objectives respecting ESG and Carbon
constraints. These offerings correspond to the application of exclusion filters,
the design of which allows the financial characteristics of the index to be
conserved. This involves reconciling financial objectives and compliance with
ESG norms and climate obligations. As such, the Core ESG, Extended ESG and Low
Carbon filters can be integrated into smart beta or cap-weighted offerings in
line with the financial objectives targeted by the investor.
Since 2021, Scientific Beta has been offering indices with pure climate
objectives (Climate Impact Consistent Indices) that allow climate exclusions and
weightings to be combined in order to translate companies’ climate alignment
engagement into portfolio decisions.
Since it was acquired by SGX in January 2020, Scientific Beta has accelerated
its investments in the area of Climate Investing as part of the SGX Sustainable
Exchange strategy, which is mobilising an investment of SGD 20 million. In
addition, EDHEC and Scientific Beta have set up a EUR 1 million/year ESG
Research Chair at EDHEC Business School.
With a concern to provide worldwide client servicing, Scientific Beta is present
in Boston, London, Nice, Singapore and Tokyo. As of June 30, 2021, the
Scientific Beta indices corresponded to USD 63.75bn in assets under replication.
Scientific Beta has a dedicated team of 55 people who cover not only client
support from Nice, Singapore and Boston, but also the development, production
and promotion of its index offering. Scientific Beta signed the United
Nations-supported Principles for Responsible Investment (PRI) on September 27,
2016. Scientific Beta became an associate member of the Institutional Investor
Group on Climate Change (IIGCC) on April 9, 2021.
Today, Scientific Beta is devoting more than 40% of its R&D investment to
Climate Investing and more than 45% of its assets under replication refer to
indices with an ESG or Climate flavour. As a complement to its own research,
Scientific Beta supports an important research initiative developed by EDHEC on
ESG and climate investing and cooperates with V.E and ISS ESG for the
construction of its ESG and climate indices.
CONTACT
Scientific Beta
1 George Street, #15-02, Singapore 049145
Tel. +33 493 187 851 (from 3.00am to 11.00pm CET)
E-mail: clientservices@scientificbeta.com | Website: www.scientificbeta.com
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