August 2017

Case study | Capability story

Smart Beta Meets
Smart Sustainability
Climate change risk protection objective

Challenge

CriteriaSolution

The client, the HSBC Bank UK Pension
Scheme, wanted a new equity index fundthat incorporated factor risk premia andclimate parameters.

Target better long-term risk-adjustedreturns, incorporate climate changerisks, and improve the effectivenessof stewardship and engagement.

The FTSE All-World ex CW Climate
Balanced Factor index incorporates
four equity factors and tilts towards
three climate change parameters.

Seeking a new multi-factor strategy
The HSBC Bank UK Pension Scheme is one of the largest corporate pension funds
in the UK. It wanted to develop a new, index-based institutional equity mandate forits mainstream defined contribution (DC) fund, into which new pension savers areenrolled by default. Together with its asset manager (Legal & General InvestmentManagement) and its investment consultant, HSBC worked collaboratively withFTSE Russell to design the new index.
The goal was for the index to incorporate both “smart beta” equity risk factors andsustainability parameters, allowing the fund to target better long-term risk-adjustedreturns while also hedging against climate change risks.

Calculating transition pathways
When seeking a new index to underlie its DC accumulation fund, the HSBC
Pension Scheme set itself a number of objectives, specifying that the index should:–

Target better long-term risk-adjusted returns through equity factors–

Incorporate protection against climate change risks–

Allow for improved stewardship and engagement–

Follow a transparent, rules-based methodology“The collaborative
development of the FTSE
All-World ex CW Climate
Balanced Factor Index was
key in achieving two of theTrustee’s objectives. The firstwas to establish an improved
risk-adjusted neutral positionby the use of factors for ourmainstream DC accumulation
fund, and the second was toincorporate climate change
risk protection by theinclusion of climate change
tilts into the index. We
believe that managing ourfund against this index rather
than a market capitalisation
one will lead to better
outcomes for our members.”– Mark Thompson, Chief
Investment Officer, HSBCBank UK Pension Scheme

Case study | Capability story

The index solution
The outcome of this collaborative effort was the FTSE All-World ex CW Climate
Balanced Factor index. This “smart sustainability” index combines a smart beta
factor approach with climate change tilts.
The index provides increased, balanced exposure to four of the most widely
utilised equity factors: value, quality, low volatility, and size. It then incorporates
three climate change parameters: carbon emissions, fossil fuel reserves andgreen revenues.
The index, which draws upon eligible equities from the FTSE All-World index, also
excludes companies involved in manufacturing weapons banned under international
treaties, such as cluster munitions and landmines.
The index follows a transparent, rules-based methodology, allowing for more
effective stewardship and engagement. It is reviewed, with a phased rebalancing
schedule, twice a year.
Fossil fuels
The index methodology reduces exposure to companies that own orare engaged in the exploration or production of fossil fuels or thesuppliers of equipment and services to the fossil fuel industry.
Carbon emissions
The index methodology reduces exposure to companies that emit highlevels of CO2 relative to other companies in the same ICB sector.
Green revenues
The index methodology increases exposure to companies that
produce goods, products and services that allow the world to adapt
to, mitigate or remediate the impacts of climate change, resource
depleting and environmental erosion.

Reflecting investment beliefs inindex design
This index shows how it is possible for an index firm to work collaboratively with aclient and its external advisors to create a new benchmark that reflects importantinvestment beliefs in its design.
The FTSE All-World ex CW Climate Balanced Factor index is smart in two ways:
it provides exposure to factors, the drivers of long-term equity returns, while also
reflecting the growing importance of sustainable investment.

Additional information
Learn more about FTSE Russell’ssmart sustainability index solutions.
Visit lseg.com/ftse-russell for
information about our products
and services.

Climate change is expected to have profound impacts on the prospects andperformance of companies across a variety of industrial sectors. As a result,climate considerations are now an important investment issue, and many investors
wish to hedge climate risks in their portfolios. However, they also wish to retain
exposure to the potential upsides that climate change may bring to stocks withparticular attributes.

FTSE Russell

2

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