Scientific Climate Indices has been featured in a recent article published by Investment & Pensions Europe (IPE) exploring growing investor concerns around climate indices, tracking error and portfolio decarbonisation. The article discusses how investors and index providers are reassessing climate benchmark methodologies as tracking error concerns increase amid a challenging market environment for decarbonisation strategies. It notably highlights upcoming changes to the MSCI Climate Action Indexes (CAI) methodology aimed at reducing ex-ante tracking error relative to parent benchmarks

As part of the feature, IPE references recent research from Scientific Portfolio assessing 18 climate benchmarks. The study found that most climate benchmarks exhibited a larger “overshoot” in projected emissions than comparable market cap-weighted benchmarks and concluded that the indices were no more likely to invest in companies with credible emissions-reduction targets than their conventional counterparts.

Commenting in the article, Shahyar Safaee stated:

“The majority were more aligned with climate risk considerations than net zero objectives. The next generation of climate-aligned indices should observe what’s happening in the economy as a whole, and in which sectors and regions, and use the real pace of decarbonisation to identify and invest in ambitious companies that lead the transition effort. Rather than setting a decarbonisation target inferred from very long-term objectives and then trying to adhere to it.”

— Shahyar Safaee, Deputy CEO and Business Development Director, Scientific Climate Indices

The full article also references how several institutional investors are reviewing or adapting their climate benchmark approaches in response to concerns around tracking error, diversification and real-world transition objectives.

Read the full article
IPE – “The identity crisis of climate indices”