Scientific Beta

This paper presents the Scientific Beta Climate Change Screen, discussing the reasons why we handle climate risks by screening the investment universe, and how to determine reliable metrics for assessing companies’ exposures to transition risks. It also discusses our Sustainability Targets Framework, which is designed to integrate positive climate and ESG targets into multi-factor indices.

To reach the goals of the Paris agreement, carbon emissions need to be reduced to net zero by 2050, i.e. we must get rid of greenhouse gases, which are largely due to fossil fuels being burned for energy. But we must also find low carbon energy sources to substitute for the fuels we phase out. All in all, we will need more energy in a future low carbon world, not less. And we will need a lot more electricity. This requires substantial investments in climate solutions, such as wind and solar power, but also other green technologies such as batteries and green hydrogen.

There are thus two sides to the climate transition coin: on the one side there is decarbonisation – what we need to get rid of – and on the other side there are the solutions – what we put in its place. From a climate investment perspective, these two sides translate into risks versus opportunities: on one side of the coin are assets highly exposed to climate transition risks, on the other side are the opportunities for revenue streams that the alternative technological solutions bring with them.

In this paper, we show how Scientific Beta builds factor strategies that deal with both sides of the transition coin, while maintaining their desired factor characteristics:

• In the first part of this paper, we present the Scientific Beta Climate Change Screen, which deals with transition risk. We discuss the reasons why we handle these climate risks by screening the investment universe, and how to determine reliable metrics for assessing companies’ exposures to transition risks.
  
  
• In the second part, we discuss our Sustainability Targets Framework, which is designed to integrate positive climate and ESG targets into multi-factor indices. It makes it possible to set explicit targets for investments in the abovementioned climate solutions, and in this paper we will set ourselves the goal of doubling the Green Revenue Ratio compared with that of a standard market benchmark.
  
  
• We conclude by demonstrating that the restrictive scope of the screening and the optimised target integration enable these two climate objectives to be achieved while preserving the factor exposures of our diversified multi-factor indices.