Scientific Beta

This paper introduces the Scientific Beta Climate+ indices.

The first climate investment strategies that were launched on the market over a decade ago focused on one of the two sides of the climate transition. So-called low-carbon or fossil-free strategies divested – partly or entirely – from carbon intensive assets, while thematic cleantech strategies addressed the climate solutions side of the transition coin. Nowadays, investors seek more holistic, two-sided climate strategies that both reduce the exposure to assets that are at risk in a transition towards a low-carbon economy and conversely reallocate capital towards those companies best positioned to capture the related opportunities.

But investors have also realised that reaching these two climate goals brings real investment risks along the way. Selling off fossil-heavy stranded assets is a winning position as long as there is a downward trend in the prices of fossil fuels. But energy prices are prone to shocks – and the outbreak of the war in Ukraine was a wake-up call for many. Similarly, climate policies and regulations can be reversed, and technological shifts are difficult to predict, which has led to cycles of boom and bust for climate solutions such as renewable energies.

Investors therefore seek holistic climate investment strategies with tight financial risk control, which are resilient to these shifts and shocks. By strictly controlling the risk of deviating from the equity market benchmarks, investors are better able to stick to their climate objectives along a transition journey that is bound to be choppy. That is how we designed the Climate+ indices that we introduce in this paper: building an investment strategy that reduces the exposure to companies that face severe risks from a climate transition, while capturing some of its upside potential, within a tight and constant tracking error risk budget.

While the first, historic, climate strategies used straightforward inputs such as Scope 1&2 carbon emissions, fossil fuel reserves and renewable energy production, providers have later been tempted to promote their proprietary datasets, which often rely on opaque and subjective methodologies. We therefore underline the importance of determining reliable metrics for assessing companies' exposures to transition risks and opportunities. By using fact-based inputs instead of subjective, opaque scores, we ensure that investors' capital allocation decisions reflect each company's real position in the climate transition.