S&P/IFCI Carbon Efficient Index

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Alka Banerjee, Vice-President Global Equities - Standard & Poor's Index & Portfolio Services - United Kingdom

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S&P/IFCI Carbon Efficient Index

  1. 1. S&P/IFCI Carbon Efficient Index Alka Banerjee Standard & Poor’s 12, November 2009
  2. 2. Several Carbon Index Approaches NA NA Indices comprised of carbon credits & derivatives (EUAs, CERs). Non-equity exposure. Carbon Emissions Trading Carbon emissions may not be as dramatically reduced as Environmental Indices depending on base index Minimize sector and individual security deviations from tracked index Indices designed to specifically track a broad market index, balancing tracking error and carbon reduction Broad Market Index Tracking May deviate significantly from broader market due to sector or individual security allocations Most direct way of reducing carbon emissions or improving other ESG attributes Indices using environmental screens to create lists of companies with desired characteristics Environmental Indices Relatively narrow in scope and not reflective of market. Direct investment in environmental industries Invests in companies which directly create clean technology or benefit from environmental trends Clean Industry Cons Pros Description Approach
  3. 3. S&P/IFCI Carbon Efficient Index <ul><li>S&P Index Services is creating an index family that seeks: </li></ul><ul><li>The S&P/IFCI Carbon Efficient Index seeks to provide exposure to emerging markets while focusing on constituents that minimize carbon footprint </li></ul><ul><ul><li>Uses carbon emissions data provided by Trucost Plc* to optimize existing benchmarks </li></ul></ul><ul><ul><li>Reduces carbon footprint by 20-25% </li></ul></ul><ul><li>The index provides a low carbon alternative while maintaining risk and reward characteristics of the S&P/IFCI LargeMid </li></ul>Underlying Index Exposure Reduced Environmental Impact
  4. 4. Choice of Benchmark <ul><li>We chose the S&P/IFCI LargeMid as our index of choice </li></ul><ul><ul><li>Well known benchmark for emerging markets </li></ul></ul><ul><ul><li>The correlation between S&P/IFCI and S&P/IFCI Large Mid is a tight 0.9998 over the last five years (2004-2009) basically ensuring the same performance as the S&P/IFCI composite </li></ul></ul><ul><li>Quality of carbon emission data can also be enhanced by focusing on large companies which have better transparency and information </li></ul><ul><li>We have used two approaches - one is based on a system of optimization and exclusions of large polluters, the other is based on reweighting high polluters down in favor of low polluters </li></ul>
  5. 5. Calculating Carbon Footprint <ul><li>Trucost Plc is a recognized leader in carbon footprint analysis with over nine years of environmental research experience and expertise </li></ul><ul><li>Trucost Plc 6 GHGs’ defined by the Kyoto protocol and converts these to CO2e to calculate the carbon footprint </li></ul><ul><li>GHG* Protocol analysis includes companies’ direct operational emissions, purchased electricity, and supplier emissions </li></ul><ul><li>Trucost Plc defines a company’s Carbon Footprint as: </li></ul><ul><ul><li>Company GHG emissions (CO 2 equivalent) </li></ul></ul><ul><ul><li>Company annual revenues </li></ul></ul>*GHG = Green House Gas
  6. 6. Carbon Emissions Statistics in Emerging Markets Data from September 2009
  7. 7. S&P/IFCI Carbon Efficient Index – Approach 1 Construction Pre-Optimization <ul><li>Member of the S&P/IFCI LargeMid* </li></ul><ul><li>Trucost coverage availability </li></ul><ul><li>Must maintain, at minimum, 40% of the original weight representation of every GICS sector in the each market in the S&P/IFCI LargeMid* </li></ul><ul><li>Use Northfield Analytics global factor model to optimize a list of constituents & weights to minimize tracking to the full S&P/IFCI LargeMid* </li></ul><ul><li>Delete stocks when removed from the S&P/IFCI LargeMid* and adjust weights among remaining equities </li></ul><ul><li>Carbon footprints updated annually, index rebalanced quarterly for maintaining tracking error </li></ul>Universe Construction Index Construction Parameters Optimization Post-Optimization Index Weighting Adjustments Maintenance and Rebalancing
  8. 8. Approach 1 Results: Annual Carbon Footprint The S&P/IFCI Carbon Reduction Capped provides an average reduction of 22% in the carbon footprint of the S&P/IFCI LargeMid via exclusions and optimization *Source: Standard & Poor’s. Data from November 2006, November 2007, November 2008, and September 2009.
  9. 9. Approach 1 Results: S&P/IFCI LargeMid vs S&P/IFCI Carbon Reduction Capped Average tracking error over four years is 1.69%
  10. 10. Approach 1 Results: Index Composition
  11. 11. S&P/IFCI Carbon Efficient Index – Approach 2 Construction <ul><li>Calculate the Percent Rank of each company within its global sector based on the Trucost carbon footprint data </li></ul><ul><li>Companies with Percent Rank greater than 50% are deemed to be excessive carbon emissions contributors and will have their weights reduced </li></ul><ul><li>Categorize the index in market sector combinations </li></ul><ul><li>Of the 142 markets, the number of companies in each market range from a low of 1 to a high of 72 </li></ul><ul><li>High Potential Market (HPM) is defined to be a market which can yield significant reductions in its carbon score </li></ul>
  12. 12. Approach 2 Construction - continued <ul><li>Utilities, energy and cement companies are the worst polluters. On the other end are financials which are far lesser polluters. Tweak weights of only the bad polluting sectors and leave other sectors untouched </li></ul><ul><li>Within each HPM, transfer 50% of the weights of the companies on the top half of the Percent Rank list and spread it equally on the companies in the bottom half of the Percent Rank distribution in the same market, on a pro rata basis </li></ul><ul><li>Stocks within 21 market sector combinations were reweighted with 136 companies had their index weights reduced and a total of 126 companies had their index weights increased </li></ul><ul><li>We are able to reduce total carbon emissions by 24.1% </li></ul><ul><li>* Carbon contributors are defined as specific sectors in a specific market. </li></ul>
  13. 13. High Potential Market Focus
  14. 14. Illustration of Weight Reallocation Based on Carbon Footprint
  15. 15. Market Sector Weights in Various Approaches
  16. 16. Final Summary <ul><li>The S&P/IFCI Carbon Efficient Index seeks to provide exposure to the emerging markets while focusing on constituents that minimize carbon footprint </li></ul><ul><li>We have explored two approaches in creating the index </li></ul><ul><ul><li>Approach 1: based on a system of optimization and exclusions of large polluters </li></ul></ul><ul><ul><li>Approach 2: reweighting high polluters down in favor of low polluters </li></ul></ul><ul><li>Approach 1 provides an average reduction of 22% in the carbon footprint of the IFCI Large Mid while… </li></ul><ul><li>Approach 2 reduces total carbon emissions by 24.1% while maintaining sector and country neutrality and full or close to full deployment of the index constituents </li></ul><ul><li>What is the right tradeoff between turnover, tracking error, and reduced carbon footprint? </li></ul>
  17. 17. <ul><li>Alka Banerjee </li></ul><ul><li>Vice President, Global Equities </li></ul><ul><li>Standard & Poor’s </li></ul><ul><li>Tel: 212-438-3536 </li></ul><ul><li>Email [email_address] </li></ul>Contact Information
  18. 18. This material was prepared by Standard & Poor’s Fixed Income Risk Management Services group. This group is analytically and editorially independent from any other analytical group at Standard & Poor’s, including Standard & Poor’s Ratings. Analytic services and products provided by Standard & Poor’s are the result of separate activities designed to preserve the independence and objectivity of each analytic process. Standard & Poor’s has established policies and procedures to maintain the confidentiality of non-public information received during each analytic process. Standard & Poor's and its affiliates provide a wide range of services to, or relating to, many organizations, including issuers of securities, investment advisers, broker-dealers, investment banks, other financial institutions and financial intermediaries, and accordingly may receive fees or other economic benefits from those organizations, including organizations whose securities or services they may recommend, rate, include in model portfolios, evaluate or otherwise address. Standard & Poor’s information contained in this document is subject to change without notice. Standard & Poor’s cannot guarantee the accuracy, adequacy or completeness of the information and is not responsible for any errors or omissions or for results obtained from use of such information. Standard & Poor’s makes no warranties of merchantability or fitness for a particular purpose. In no event shall Standard & Poor’s be liable for direct, indirect or incidental, special or consequential damages resulting from the information here regardless or whether such damages were foreseen or unforeseen. This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments, strategies to you nor is it considered to be investment advice. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. © 2009 Standard & Poor’s Financial Services LLC. All rights reserved. STANDARD & POOR’S, S&P, Capital IQ, ClariFI, Compustat, CrossWalk, Cross Reference Services and RatingsDirect are registered trademarks of Standard & Poor’s Financial Services LLC. Copyright © 2009 by Standard & Poor’s Financial Services LLC. All rights reserved. CUSIP is a registered trademark of the American Bankers Association. DUNS is a registered trademark of D&B. GICS is a trademark of MSCI and Standard & Poor’s.

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