Index Education

Transition to a 1.5°C World with the
S&P Paris-Aligned & Climate
Transition Indices
Contributors
Mona Naqvi
Senior Director, Head of
ESG Product Strategy
North Americamona.naqvi@spglobal.com
Ben Leale-Green
Analyst, Research & Design
ESG Indicesben.leale-green@
spglobal.com

The landmark Paris Agreement marked a sea change in the global fightagainst climate change.1 Backed by empirical evidence from the UN
Intergovernmental Panel on Climate Change (IPCC), ambition has sincegrown to limit global temperature rise to 1.5°C since pre-industrial levels.
To date, climate-conscious investors have largely focused on reducing
relative portfolio carbon exposure, but divergent methodologies have madefertile ground for so-called “greenwashing.” While point-in-time analyses do
not necessarily inform alignment with our needed transition to a low-carbon
economy. However, a combination of groundbreaking new datasets andindex innovation is emerging. Investors now have the choice to align with ascenario that may mitigate the most catastrophic impacts. The European
Union (EU) is in the process of finalizing standards for defining a ClimateTransition Benchmark (CTB) and a Paris-aligned Benchmark (PAB), both ofwhich use absolute measures to align with a 1.5°C trajectory rather thansimply a relative carbon reduction.2 Our S&P PACTTM: Paris-Aligned &Climate Transition Indices offer a powerful set of investment solutions tomeet the proposed standards, in addition to other climate objectives. Thisnew breed of sustainable climate indices therefore provides a pathway forinvestors to:
1. Go beyond the Paris Agreement and align investments with a 1.5°C
trajectory toward achieving net-zero emissions by 2050;
2. Adopt a strategy compliant with the proposed standards for the EU
CTBs and PABs and recommendations from the TCFD—accounting
for the physical risks, transition risks, and opportunities arising fromclimate change; and3. Address numerous climate objectives efficiently, while staying as
close to the underlying index as possible with broad, diversified
exposure.
This paper underscores how the S&P PACT Indices could help investorstransition to a 1.5°C world and achieve other climate objectives.

1

The Paris Agreement is an international treaty, sponsored by the UN Framework Convention on Climate Change (UNFCCC), to keep theincrease in global average temperature rise to “well below 2°C above pre-industrial levels” that went into effect in November 2016.

2

In December 2018, the EU enacted a law creating two new climate benchmarks via amendment EU 2019/2089. In September 2019, an
EU-appointed Technical Expert Group (TEG) proposed minimum standards for these benchmarks in its final report, which will be used by
the EU to prepare and publish the final delegated acts, expected sometime in 2020.

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Transition to a 1.5°C World with the S&P PACT Indices

Many are committed toreducing GHG
emissions…

…and the goal is now
not only the well below
2°C target of the Paris
Agreement…

June 2020

A SCIENCE-BASED APPROACH: THE IMPORTANCE OF
CLIMATE TRANSITION
Few climate scientists would dispute the Earth’s climate is rapidly warming
due to human activity, with potentially catastrophic impacts.3 Many are
therefore committed to reducing greenhouse gas (GHG) emissions, and thegoal is now not only the well below 2°C target of the Paris Agreement, butless than 1.5°C of warming since pre-industrial levels.4 Indeed, climate
models reveal an ominous non-linear relationship between GHG emissions
and several climate tipping points, which could set off dramatic andirreversible effects. For example, just 1-3°C of warming could melt theentire Greenland ice sheet, triggering a reversal in Atlantic Ocean currents,
amounting to sea-level rise, heat accumulation in the Southern Ocean and,ultimately, further ice loss from the East Antarctic ice sheet.5 At higher
levels of global warming, we would see even more severe consequences ofthis nature.6
The human implications of these complex and unprecedented interactions
are potentially disastrous. With a rise of 2°C, significantly more people will
likely face reduced crop yields, habitat degradation, heatwave exposure,hydro-climate risk to power production, and water stress than with 1.5°C ofwarming (see Exhibit 1). It seems that just an additional 0.5°C of warming
between these two scenarios could have exponentially more devastating
human consequences, let alone at higher warming scenarios.

Predicted Increase in the
Number of Humans Affected by
Climate Impacts…but less than 1.5°C ofwarming since preindustrial levels.

Exhibit 1: Predicted Increase in the Human Impacts of Global Warming
between a 2°C and 1.5°C Scenario
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Crop Yield
ChangeHabitatDegredation

Heatwave Event
Exposure

Hydroclimate
Water Stress
Risk to Power
Index
Production
Source: IOP Science, as shown in Byers et al, 2018. Data as of May 2018. Chart is provided forillustrative purposes.

In January 2020, global land and ocean surface temperature was recorded
at its highest level in 141 years, at 1.14°C above the 20th century average3

Numerous publications in peer-reviewed scientific journals highlight that more than 97% of climate scientists believe the earth’s climate is
rapidly warming due to human activity. https://iopscience.iop.org/article/10.1088/1748-9326/11/4/048002.

4

Since the IPCC released its special report, Global Warming of 1.5°C (Masson-Delmotte et al., 2018), there has been growing interest inmeeting the more ambitious 1.5° target than the commitments of the Paris Agreement focused on well below 2°C.

5

Keenan et al. 2016; Mengel and Levermann. 2014; Armour et al. 2016.

6

Steffen et al. 2018.

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Transition to a 1.5°C World with the S&P PACT Indices

June 2020(NOAA National Centers for Environmental Information, 2020). However,snap assessments like these do not paint a complete picture, given the
non-linear complexities of the climate system. Thus, it begs the question,
what trajectory are we on and is it aligned with a 1.5°C scenario?
Just an additional 0.5°C
of warming between the
1.5°C and 2°C scenarios
could have exponentiallymore devastating humanconsequences.

In the absence of corrective action, global warming is expected to reach
4.1°C-4.8°C above pre-industrial levels by the end of this century.7 Under
current policies, moderate estimates suggest that we are still likely to emit
more than double the levels required to achieve a 1.5°C scenario by 2030
(see Exhibit 2). Ultimately, the answer will depend on the behavior ofgovernments, policymakers, and market participants alike to transform thestatus quo and radically transition to a lower-carbon economy. From an
investor’s perspective, this includes decisions on how and where to allocate
their capital—as well as the benchmarks used to evaluate their investment
performance.
Exhibit 2: Emissions and Warming Predictions Based on Current Pledges
and Policies

In January 2020, global
land and ocean surface
temperature wasrecorded at its highest
level in 141 years, at
1.14°C above the 20th
century average...

Source: Climate Action Tracker. Data as of December 2019. Chart is provided for illustrative purposes.

…which begs thequestion: what trajectory
are we on and is italigned with a 1.5°C
scenario?

DEFINING STANDARDS FOR THE LOW-CARBON
TRANSITION
EU Paris-Aligned and Climate Transition Benchmarks
In March 2018, the European Commission published its action plan8 toreorient capital flows toward investment for “sustainable and inclusive
growth.” Key to this will be increased private sector environmental andclimate-related expenditure. To this end, the EU is in the process of
introducing minimum standards for two new climate benchmark labels toalign investments with a 1.5°C trajectory and prevent climate index
greenwashing. Specifically, these are the Climate Transition Benchmarks

7

Temperatures | Climate Action Tracker, 20198https://ec.europa.eu/info/publications/180308-action-plan-sustainable-growth_en

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Transition to a 1.5°C World with the S&P PACT Indices

To increase private
sector environmental
expenditure, the EU is
introducing the Climate
Transition Benchmarks(CTBs) and Paris-aligned
Benchmarks (PABs)…

June 2020(CTBs) and Paris-aligned Benchmarks (PABs), both of which use absolutemeasures of becoming 1.5°C scenario compatible rather than simply arelative carbon reduction.
To ensure the labels are reliable and easy to recognize, only administratorsthat comply with the regulatory requirements can use them when marketingclimate benchmarks in the EU. Exhibit 3 summarizes the current proposed
minimum standards from the EU-appointed TEG’s final report for each ofthese new labels.9
Exhibit 3: Minimum Technical Standards for EU CTBs and PABs

…which use absolutemeasures of being 1.5°C
scenario compatible
rather than simply
relative carbon reductive.

To ensure the EU CTB
and PAB labels arereliable and easy torecognize…

MINIMUM STANDARDS

CTB

PAB

Minimum Scopes 1, 2, and (3) GHG
Emission Intensity Reduction
Compared with the Underlying
Benchmark

30%

50%

Scope 3 Phase-in Period

Up to four years

Baseline Exclusions

Controversial weapons and societal norm violators

Activity Exclusions






Year-on-Year Self-Decarbonizationof the Benchmark
Minimum Green Share/Brown Share
Ratio Relative Compared with
Investable Universe (Voluntary)
Exposure Constraints
Corporate Target Setting
Immediate Disqualification

Coal (≥ 1% revenues)
Oil (≥ 10% revenues)
Natural gas (≥ 50% revenues)
NoneElectricity producers withlifecycle GHG emissions higher
than 100 gCO2e/kWh (≥ 50%
revenues)
At least 7% on average per year: in line with or beyond thedecarbonization trajectory from the IPCC’s 1.5°C scenario(with no or limited overshoot)At least equivalentSignificantly larger (factor 4)

Minimum exposure to sectors highly exposed to climate
issues is at least equal to equity market benchmark value.
Weight increases considered for companies that set evidencebased targets under strict conditions to avoid greenwashing
If misaligned with trajectory for two consecutive years

Source: S&P Dow Jones Indices LLC, The EU Technical Expert Group on Sustainable Finance. Tableis provided for illustrative purposes.

The Task Force on Climate-related Financial Disclosures (TCFD)…only administrators thatcomply with theregulatory requirements
can use them whenmarketing climate
benchmarks in the EU.

Beyond the EU, global initiatives such as the G20’s Task Force on Climaterelated Financial Disclosures (TCFD) have also sought to enhance market
transparency on climate risks and opportunities to support sustainable
investment. The TCFD’s final report10 gave recommendations for corporate
and investor climate disclosure and underscored the importance ofreporting on the financial impacts of climate-related risks andopportunities—comprising both transition and physical climate risks (seeExhibit 4).

9

Please note that the EU is in the process of finalizing the minimum standards for CTBs and PABs, and these are subject to change. Anychanges to the EU-delegated acts will be taken into consideration and potentially reflected in a revised methodology for the S&P PACT
Indices.

10

https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-2017-TCFD-Report-11052018.pdf

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Transition to a 1.5°C World with the S&P PACT Indices

The TCFD also gave
recommendations forclimate disclosure,underscoring theimportance of reportingon the financial impactsof transition andphysical climate risks.

Physical climate risks
include more frequent
extreme weather events,
as well as shifts in longterm weather patterns
and sea-level rise.

June 2020

Physical climate risks include more frequent and severe extreme weather
events such as storms, hurricanes, and floods (acute impacts), as well as
shifts in long-term weather patterns and sea-level rise (chronic impacts).
Physical risk thereby threatens companies potentially facing asset writedowns, disruptions in supply chains, and costly insurance premiums forhigh-risk locations.
Transition risk, on the other hand, refers to the costs associated with thepolicy, legal, technological, and reputational risks from adapting to climatechange. For example, if policymakers attempt to curb emissions withcarbon taxes and emission trading schemes, certain companies may facehigher operating costs that they may not be able to pass on. These might
encourage them to substitute products or technologies for low-carbon
alternatives that could create technological risk if assets are retired early.
Meanwhile, shifts in consumer preferences and reputational damage tocompanies that are slow to adapt to a transition might erode brand value
and ultimately decrease revenues. However, a transition to a low-carbon
economy will likely create both winners and losers. A successful transitionis expected to require about USD 1 trillion of investment each year in
gainful areas such as low-carbon energy, resource efficiency, andsustainable products.11
Exhibit 4: TCFD Approach to Climate-related Risks and Opportunities

Source: TCFD final report (2017:8). Chart is provided for illustrative purposes.

Transition risk refers to
the costs associated with
policy, legal, technology,
and reputation from
adapting to climatechange.

11

Transition and physical climate risks are not a priori connected. As thescience points out, failure to transition to a low-carbon economy would
increase the likelihood and severity of physical risks. While failure to
mitigate physical risks would seem to suggest the market is not adequatelytransitioning. Even under a 1.5°C scenario, physical climate risks will likely
occur more frequently and cause more damage than they do now.
Neglecting both types could result in less climate risk mitigation than astandard market-cap-weighted index. A holistic, climate-aligned strategy,
incorporating TCFD recommendations, must therefore address types ofclimate risk, as well as the opportunities arising from climate change.

TCFD final report (June 2017), Executive Summary, Page ii. https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-2017-TCFDReport-11052018.pdf.

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Transition to a 1.5°C World with the S&P PACT IndicesTo align with the EU
CTBs and PABs, S&P
DJI has launched the
S&P Paris-Aligned andClimate Transition
Indices.

June 2020

INTRODUCING THE S&P PACT INDICES
To meet the EU’s proposed minimum standards for CTBs and PABs, wehave launched two new index series: the S&P Paris-Aligned Climate (PA)Indices and S&P Climate Transition (CT) Indices, respectively, collectively
referred to as the S&P Paris-Aligned and Climate Transition (PACT)
Indices. Both methodologies meet the respective EU requirements12 andother climate objectives to become compatible with a 1.5°C scenario andrecommendations from the TCFD (see Exhibit 5).
Exhibit 5: The S&P PACT Index Methodology Inputs

They meet the respective
EU requirements andadditional climate
objectives to becomecompatible with a 1.5°C
scenario and TCFD
recommendations.

Source: S&P Dow Jones Indices LLC. Chart is provided for illustrative purposes.

Historically, they achievethese objectives without
sacrificing performance.

12

The S&P PACT Indices’ Methodology is rooted in transition risks, physicalrisks, and the opportunities from climate change, as recommended by the
TCFD. This, in addition to the inclusion of several other climate objectives,means the methodology goes beyond the EU’s proposed minimum
standards to provide an even more robust and holistic investment solution
for transitioning to a 1.5°C world. It achieves all of these objectives
simultaneously, through an optimization that minimizes deviations from theunderlying index, which has historically resulted in a broad and diversified
index with similar performance to the benchmark. The various climate
objectives included as inputs into the methodology are as follows.

The S&P PACT Indices meet the proposed minimum standards for the EU CTBs and PABs based on the final report published by the EU
TEG. The EU is in the process of finalizing the minimum standards, and therefore, these are subject to change.

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June 2020

1) Climate Objectives Required by the EU’s Proposed MinimumStandards
The S&P PACT IndicesMethodology is rooted intransition risks, physicalrisks, and theopportunities fromclimate change…



Reduce the GHG emissions intensity of the index at 7% yearon-year, to align with carbon neutrality by 2050, using scopes 1,
2, and 3 emissions for each company from inception.13
Overweight companies with publicly disclosed science-basedtargets that meet certain thresholds as defined by the EU.
Improve or maintain green-to-brown revenue share. For the
S&P PA Index, increase the green-to-brown share of the index
by a factor of 4; for the S&P CT Index, prevent any worsening of
the green-to-brown share relative to the underlying index.

2) Additional Climate Objectives Included for a More Holistic
Approach…meaning it goesbeyond the EU’s
proposed minimum
standards to provide aneven more robust
investment solution.







13

Incorporate transition pathway models, recommended by the
Science Based Targets initiative (SBTi), to assign companies
with individual carbon budgets compatible with a 1.5°C
trajectory. Ensure the weighted average budget, per dollar
invested, is below zero at rebalance to give 1.5°C compatibility
on a forward-looking basis.
Decrease or maintain fossil fuel reserve exposure to limit thepotential risk posed by stranded assets.
Improve or maintain environmental policy strength, measured by
the S&P DJI Environmental Score. For the S&P PA Index,
increase exposure to companies with superior policies arguably
better positioned for the low-carbon transition; for the S&P CT
Index, prevent any worsening of environmental policy strength.
Dynamically cap individual company risk exposure to physicalrisks to mitigate tail risk from acute climate hazards (e.g., storms
and floods).
Reduce or maintain the weighted average physical climate risk
exposure of the index to mitigate long-term effects of chronic
physical risks (e.g., sea-level rise).

The GHG Protocol classifies a company’s GHG emissions into three scopes. Scope 1 emissions are direct emissions from owned orcontrolled sources. Scope 2 emissions are indirect emissions from the generation of purchased energy. Scope 3 emissions are all indirectemissions (not included in scope 2) that occur in the company’s value chain—including both upstream and downstream emissions. The EU
benchmark regulation only requires Scope 3 emissions to be phased in within four years, but the S&P PACT Index Methodology
incorporates all GHG scopes 1, 2, and 3 from inception.

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June 2020

HOW THE S&P PACT INDICES GO BEYOND THE PARISAGREEMENT AND HELP ALIGN INVESTMENTS WITH THE
1.5°C CLIMATE GOAL
A Transition Pathway Approach
The S&P PACT Indicesuse Trucost data andmodels to assess
constituents’ GHG
emissions as comparedto the 1.5°C scenario
compatible budget.

The budgets reflect acompany’s share of therequired decarbonization
rate for the world totransition to a 1.5°C
scenario.

The S&P PACT Indices use forward-looking data and models from Trucost,
part of S&P Global, to assess the GHG emissions of each constituent andtheir GHG emissions compared with a 1.5°C scenario compatible budget.
These budgets may be set in two ways—both of which were developed byleading academics14 and are supported by the SBTi.
The budgets reflect a company’s share of the required decarbonization rate
for the world to transition to a 1.5°C scenario from each company’s baseyear emissions. For example, if all nations were to cut their GHG
emissions per unit of GDP by 5% per year, global GHG emissions would be
50% lower in 2050 than in 2010, so long as the economy continues to growat its historical rate of 3.5% per year.15 As such, this suggested 5% yearon-year reduction may be translated into individual company budgets basedon their GHG emissions per unit of value-added (gross profit) to the global
economy, otherwise known as the GEVA approach.16 This approach isused when companies have diverse business activities, or when theirbusiness activities do not have established transition pathways defined by
IEA climate scenario models.
However, for companies with operations concentrated in certain highemitting activities,17 sector-specific budgets are defined in terms of a given
unit of output (for example, tons of carbon and carbon equivalents (tCO2e)
per ton of crude steel produced). This method, known as the Sectoral
Decarbonization Approach (SDA),18 permits sectors to decarbonize atvarying speeds, depending on the opportunities available given the current
technologies within each sector.

For companies with
operations concentrated
in certain high-emitting
activities, sector-specificbudgets are defined.

Together, these budgets assign each company a maximum amount ofemissions each year. Trucost compares these budgets with forwardlooking estimates and realized GHG emissions for companies. Exhibit 6
illustrates what the individual company emission trajectories might look like.
In this way, Trucost models company emissions toward a trajectory
consistent with a 1.5°C scenario in their transition pathway models. This
enables the S&P PACT Indices to reweight companies, so the index as awhole is 1.5°C compatible, on a forward-looking basis, at rebalance.

14

As referenced in footnotes 16 and 18.

15

Science Based Targets initiative, 2020. https://sciencebasedtargets.org/existing-methodologies/.

16

Randers, 2012.

17

These include power (GWh), cement (tons), steel (tons), aluminum (tons), and air transport (passenger miles).

18

Krabbe et al., 2015.

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Transition to a 1.5°C World with the S&P PACT Indices

June 2020

450
400
350
300
250
200
150
100
50

The Trucost transition
pathway models enable
S&P PACT Indices toreweight companies, so
the index is 1.5°C
compatible, on a forwardlooking basis.

2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

0

2012

Together, the GEVA andSDA approaches assign
each company amaximum amount of
GHG emissions eachyear.

Carbon Intensity (tCO2e/USD Million Gross Profit)

Exhibit 6: Illustrative Company GHG Emission Trajectories

Energy Company Y Carbon Intensity (Realized or Projected)
Energy Company Y Carbon Budget
Energy Company X Carbon Intensity (Realized or Projected)
Energy Company X Carbon Budget
Source: Trucost, part of S&P Global. The GHG emissions intensity is based on scopes 1 and 2
emissions to avoid double counting when setting individual company budgets. Chart is provided forillustrative purposes.

Rewarding Companies with Science-Based Targets
To enhance exposure of companies aligned with a 1.5°C scenario, the S&P
PACT Indices overweight companies with publicly disclosed science-basedtargets (SBTs) that adhere to the following criteria (see Exhibit 7), as per
the EU’s proposed minimum standards, to prevent climate index
greenwashing.
Exhibit 7: Proposed EU Criteria for Companies with SBTs
CRITERIA FOR COMPANY SBTs

The S&P PACT Indices
overweight companies
with publicly disclosed
science-based targets
that adhere to the EU’s
proposed minimum
standards.

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1.

The targets are publicly disclosed and aligned with a 1.5°C scenario.

2.

The targets incorporate all scopes 1, 2, and 3 emissions.

3.

Companies sufficiently disclose their scopes 1, 2, and 3 emissions.

4.

Companies must exhibit 7% annualized decarbonization over the past three years.

5.

The targets must represent an annualized decarbonization rate of 7% when accounting for
scopes 1, 2, and 3 (both upstream and downstream) targets, assuming the companies’ current
composition of emissions.
Source: The EU Technical Expert Group on Sustainable Finance. Table is provided for illustrative
purposes.

If a company discloses SBTs, it demonstrates that it is actively thinking
about and managing its transition to a low-carbon future and is thus more
likely to succeed in reducing its exposure to transition risks. However, any
company that discloses SBTs must be held accountable to ensure it
achieves what it claims to do. Hence, the importance of setting suchstringent criteria before overweighting companies in climate indices seeking
either EU CTB or PAB labels. The S&P PACT Index Series rewards
9Transition to a 1.5°C World with the S&P PACT Indices

Unlike the EU’s proposed
minimum standards, theS&P PACT IndicesMethodology includes
scopes 1, 2, and 3 fromthe start.

June 2020

companies that meet the above criteria by increasing their standing in theindex with at least a collective 20% overweight. This collective overweightfunction allows for some companies to be overweighted by more than thisand potentially for some to be underweighted. This thereby provides theflexibility required to incorporate numerous other climate objectives in the
S&P PACT Index Series Methodology.

The Treatment of Scope 3 Emissions

At the activity level, the
DNSH principle instructs
that contributing to one
environmental objective
should not significantly
harm any otherenvironmental objectives.

The EU’s proposed minimum standards provide up to a four-year grace
period for phasing in scope 3 emissions. However, the S&P PACT Indices’
Methodology includes scopes 1, 2, and 3 from the start.19 Both upstream
and downstream scope 3 emissions are key to understanding a complete
picture of company emissions throughout the value chain. This isespecially true since the ratio of scopes 1 and 2 emissions with scope 3
emissions is not constant across sectors. As such, incorporating scope 3
emissions helps to ensure a more holistic assessment of a company’s
overall transition risk.

Index Exclusions and the Principle of “Do No Significant Harm”

To meet the EU’s
proposed minimum
standards, the S&P
PACT Indices make all ofthese exclusions, and goeven further.

In addition to the primary goal of transitioning to a 1.5°C scenario, the EU’s
proposed minimum standards espouse a principle of “Do No Significant
Harm” (DNSH). At the security level, this means ensuring that the pursuitof environmental objectives is not at the expense of social norms. Thus,
the proposed standards demand baseline exclusions of companies withdirect controversial weapons exposure and companies at risk of violating
global social norms, measured by their performance against the principlesof the UN Global Compact. At the activity level, the DNSH principle
instructs that contributing to one environmental objective should not
significantly harm any other environmental objectives. As such, theregulation requires the exclusion of companies embroiled in controversies
arising from practices that significantly harm one of several environmental
objectives.20
To meet the EU’s proposed minimum standards, the S&P PACT Indicesmake the above exclusions, and go even further—by additionally excluding
companies with direct exposure to tobacco and those involved in material
public controversies pertaining to broader environmental, social, andgovernance (ESG) issues, not just the various environment-related

19

The GHG Protocol classifies a company’s GHG emissions into three scopes. Scope 1 emissions are direct emissions from owned orcontrolled sources. Scope 2 emissions are indirect emissions from the generation of purchased energy. Scope 3 emissions are all indirectemissions (not included in scope 2) that occur in the value chain of the company, including both upstream and downstream emissions.
(Greenhouse Gas Protocol. https://ghgprotocol.org/sites/default/files/standards_supporting/FAQ.pdf).

20

These include: 1) climate change mitigation; 2) climate change adaptation; 3) sustainable use and protection of water and marine
resources; 4) transition to a circular economy, waste prevention and recycling; 5) pollution prevention and control; and 6) protection ofhealthy ecosystems.

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June 2020

controversies stipulated, for a more sustainable climate index.21 Further,
unrelated to the DNSH principle, benchmarks seeking to obtain the more
ambitious EU PAB label must additionally exclude various fossil fuel andpower generation companies based on business activities. Exhibit 8
describes the exclusions of the S&P PACT Indices in detail.
Benchmarks seeking toobtain the more
ambitious EU PAB label
must additionally exclude
various fossil fuel andpower generationcompanies based on
business activities.

Exhibit 8: S&P PACT Index Series Exclusions
EXCLUSION

THRESHOLDESG EXCLUSIONS
Controversial Weapons

Any direct exposure of 25% or greater ownership

Low UN Global Compact Score

Worst 5% globally

Controversies (SAM MSA)

Daily filtering, screening, and analyzing of controversies related tocompanies within the index; index committee reviews and excludes
worst offenders

TobaccoAny direct exposure of 25% or greater ownership

FOSSIL FUEL OPERATIONS AND POWER GENERATION (ONLY APPLIES TO THE S&P PA INDICES)
1% or more of revenue derived from coal exploration or processing
activities
10% or more of revenue derived from oil exploration or processing
Oilactivities
50% or more of revenue derived from natural gas exploration or
Natural Gas
processing activities
50% or more of revenue derived from electricity generation with a
Highly Intensive Electricity Generation
GHG intensity of lifecycle GHG emissions above 100 gCO2e/kWh
Source: S&P Dow Jones Indices LLC. Table is provided for illustrative purposes.
Coal

TWO BIRDS, ONE STONE: HOW THE S&P PACT INDICESALIGN WITH THE EU’S PROPOSED MINIMUM STANDARDSAND TCFD RECOMMENDATIONSClimate modelingdatasets and hazard
models must be coupledwith geolocation-specific,
asset-level data.

Accounting for Physical Climate Risks
Unlike transition risk, which can affect companies in any location, specificlocations have increased likelihood of physical climate risk. Thus, climate
modeling datasets and hazard models must be coupled with geolocationspecific, asset-level data. Trucost’s climate change physical risk dataset—
which includes the impact of wildfires, cold waves, heatwaves, water stress,
sea-level risk, floods, and hurricanes—is unparalleled in this regard, within
investable products.
Exhibit 9 summarizes Trucost’s physical risk methodology. In addition toassessing a company’s exposure to physical climate risks, Trucost also
determines a company’s sensitivity to these risks, based on the types ofasset and business operations affected. For example, an IT firm’s
corporate offices are generally less sensitive to water stress than a foodand beverage company’s manufacturing plants, as the former is much less21

This is achieved through the use of Media & Stakeholder Analysis (MSA) from SAM, part of S&P Global. For more information, visit
https://portal.csa.spglobal.com/survey/documents/MSA_Methodology_Guidebook.pdf.

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June 2020

water intensive. However, the IT firm’s office might be more sensitive toheatwaves due to falling worker productivity and overheating equipment.
Trucost’s dataset allows
the S&P PACT IndexSeries to go beyond therequirements of the EU
CTB and PAB labels…

Trucost’s dataset allows the S&P PACT Index Series to go beyond therequirements of the EU CTB and PAB labels, capping individual company
exposure to physical risk and reducing the physical climate risk exposure of
the index overall. The former helps to mitigate tail risk from acute climate
hazards, such as hurricanes and wildfires, while the latter serves to mitigate
the long-term effects of chronic physical risks like rising sea levels.
Exhibit 9: Trucost Physical Risk Methodology…capping individualcompany exposure tophysical risk andreducing the physicalclimate risk exposure of
the index overall.

Climate Modeling Datasets
and Hazard Models

Map Climate Change Hazards

Asset Location Dataset
Overlaid with Hazard Maps

Quantify Exposure

Sensitivity of Business
Models to Different Forms of
Physical Risk

Adjust for Risk Sensitivity/Materiality

Corporate Physical Risk Profile and Score
Source: Trucost, part of S&P Global. Chart is provided for illustrative purposes.

Sizing up the Opportunities

From an investor’s
perspective, theconsequences of climate
action (or lack thereof)
can lead to gains andlosses.

22

From an investor’s perspective, the consequences of climate action (or lackthereof) can lead to both gains and losses. Ignoring the opportunities does
not allow investors to benefit from the low-carbon transition. For example,
while a 1.5°C scenario implies fossil fuels would need to fall from 83% ofprimary energy in 2020 to about 33% in 2050, the slack will likely be picked
up by renewables, expected to grow from 15% to about 60% over the same
period.22 To account for this, the S&P PA Indices make adjustments tocompanies’ weights that are involved in power generation, improving thegreen-to-brown ratio by overweighting companies with more revenues fromgreen power generation activities relative to brown. The weights areaccounted for so that the green-to-brown ratio of the index is either
maintained in the S&P CT Indices or improved by at least a factor of four
for the S&P PA Indices, relative to the underlying benchmark. These
adjustments further demonstrate the holistic approach that has been
adopted to align the S&P PACT Indices with recommendations from theEU-appointed TEG and the TCFD (see Exhibit 10).

Rogelj, 2018.

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Transition to a 1.5°C World with the S&P PACT Indices

To deepen alignment
with the TCFD
framework, the S&P
PACT Indices go beyond
the EU’s proposed
minimum standards.

June 2020

Exhibit 10: Green and Brown Power Generation Activities Assessed in the S&P PACT Indices
GREEN POWER GENERATIONBROWN POWER GENERATION

Biomass Power Generation

Coal Power Generation

Geothermal Power Generation

Petroleum Power Generation

Hydroelectric Power Generation

Natural Gas Power Generation

Solar Power Generation
Wave and Tidal Power Generation
Wind Power Generation
Nuclear Electric Power Generation
Source: S&P Dow Jones Indices LLC. Table is provided for illustrative purposes.

A More Holistic Approach to Transition Risk
The S&P PA Indices
reduce the fossil fuelreserve exposure by aminimum of 80%...

…while the S&P CT
Indices maintainexposure so it is noworse than theunderlying index.

The S&P PACT Indicesseek to improve or
maintain environmental
policy strength, asmeasured by the S&P
DJI Environmental
Scores.

23

To deepen alignment with the TCFD framework, the S&P PACT Indices go
beyond the EU’s proposed minimum standards and incorporate thefollowing additional objectives for a more holistic approach to transition risk.
i.

Mitigating Stranded Asset Risk: To mitigate the possibility of
exposure to costly asset write-downs, the S&P PA Indices reduce
the fossil fuel reserve exposure by a minimum of 80%, while the
S&P CT Indices maintain exposure so it is no worse than theunderlying index. This is important because the achievement ofeven a 2°C scenario requires that 80% of all known—proven andprobable—fossil fuel reserves must remain firmly within the
ground.23 The reason for this is that the GHG emissions that would
otherwise be released from their combustion would be so significant
that the resultant rise in global temperatures would likely far exceed
2°C of warming since pre-industrial levels. Thus, for the more
ambitious goal of transitioning to a 1.5°C world, the curbing of fossil
fuels must be even greater. However, still to this day, the valuationsof fossil fuel companies tend to assume that these reserves—listed
as assets on company balance sheets—will eventually be realized.
To the extent that carbon-limiting regulation is successful inachieving the goals of the Paris Agreement (let alone more stringent
climate action), these assets may become “stranded,” implying a
potentially systemic mispricing of fossil fuel companies as currently
overvalued—with potential risk for any investment strategy that
continues to hold them.

ii. Environmental Policy Strength: Companies with strong
environmental policies are arguably better equipped to deal with therisks posed by the low-carbon transition. For this reason, the S&P
PACT Indices seek to improve (PAB label) or maintain (CTB label)environmental policy strength, as measured by the S&P DJI
Environmental Score. This score provides insights into thefinancially material aspects of a company’s climate strategy,

Carbon Tracker, 2011.

INDEX EDUCATION | ESG

13

Transition to a 1.5°C World with the S&P PACT IndicesIn the S&P PACT IndicesMethodology, the climate
objectives serve as
optimization constraints...

…where the objectivefunction is to minimize
active share whileaccommodating theclimate requirements.

June 2020

environmental policy and management systems, electricity
generation, environmental business risks and opportunities, lowcarbon strategy, recycling strategy, co-processing, and more. The
S&P PA Indices ensures a weighted average increase of S&P DJI
Environmental Score relative to the underlying index by 20% of thepossible improvement. The S&P CT Indices prevents any
worsening of environmental policy strength. S&P DJI Environmental
Scores, available through S&P DJI ESG Scores,24 are based upon
the renowned SAM Corporate Sustainability Assessment, which
ranks as the highest quality among ESG rating providers, according
to leading sustainability professionals (Rate the Raters Survey,
SustainAbility, 2019).25

MAINTAINING BROAD, DIVERSIFIED EXPOSURE
The Benefits of Minimizing Active ShareIn the S&P PACT Indices Methodology, the climate objectives discussed
thus far serve as optimization constraints—where the objective function is
to minimize active share while accommodating the climate requirements.

Minimizing active sharehelps to reduce theimpact of the absolutedecarbonization on
tracking error.

This matters especially because a transition to a 1.5°C world will likely
require an absolute reduction in global GHG emissions. Thus, in addition
to an initial 30% and 50% carbon reduction relative to the underlying index
for the CTBs and PABs, respectively, the EU’s proposed minimum
standards require a 7% year-on-year self-decarbonization. This target isunrelated to the emissions trajectory of the underlying benchmark. Thismeans that at any given point in time, the precise decarbonization of theindex relative to the benchmark is unknown. For this reason, minimizing
active share helps to reduce the impact of the absolute decarbonization—
which is needed to align with a net-zero emissions pathway by 2050 (i.e., a
1.5°C scenario)—on tracking error.
Exhibit 11 illustrates the potential future carbon intensity trajectories for the
CTBs, PABs, and the underlying benchmark (top panel), as well as theimplications of the emissions trajectory of the underlying benchmark on therelative carbon intensity reduction that will be required for the CTBs and
PABs (bottom panel). Note the initial reductions of 30% and 50%
emissions relative to the underlying benchmark for the CTB and PAB
versions, respectively.

24

To learn more about S&P DJI Environmental and S&P DJI ESG Scores, visit https://spdji.com/topic/esg-scores

25

Approximately 70% of respondents to this annual survey of sustainability professionals had more than 10 years of experience. Visit
https://sustainability.com/our-work/reports/rate-raters-2019/ to learn more.

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Transition to a 1.5°C World with the S&P PACT Indices

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Exhibit 11: Hypothetical Future GHG Intensity Trajectories and Relative GHG
Intensity Reduction Requirements to Retain EU PAB and CTB Status andAlign with a 1.5°C Scenario

Exhibit 11 shows theinitial reductions of 30%
and 50% emissions
relative to the underlying
benchmark for the CTB
and PAB versions,
respectively.

Source: S&P Dow Jones Indices LLC. Charts are provided for illustrative purposes.

We have high confidence
that an absolute
reduction in GHG
emissions is required tolimit warming to 1.5°C
since pre-industrial
levels.

INDEX EDUCATION | ESG

The future GHG emissions intensity trajectory of the underlying benchmark
is unknown. However, we have high confidence that an absolute reduction
in GHG emissions is required to limit global warming to within 1.5°C since
pre-industrial levels. As such, the 7% year-on-year decarbonization target
required by the EU CTB and PAB labels means the future required
decarbonization relative to the underlying benchmark is unknown, since we
do not know how quickly the benchmark would decarbonize (if at all). If theunderlying benchmark decarbonizes at a rate of less than 7% year-on-year,
then the implied decarbonization relative to the underlying index (bottom
panel) will grow exponentially. Using an optimization to minimize active
share helps reduce the possibility of high tracking error between the index
and its underlying benchmark, and may be particularly useful if the overallmarket fails to decarbonize at a sufficient rate over time. Furthermore,strategies that target a specific level of tracking error or active share mayfind their methodology does not facilitate a solvable solution if the required
decarbonization increases.
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Transition to a 1.5°C World with the S&P PACT Indices

June 2020

Summary of S&P PACT Indices Methodology
The methodology first excludes ineligible constituents from the underlying benchmark universe (seeExhibit 8). Then, based on the eligible constituents that remain, the methodology assigns weights by
optimizing to minimize the differences in weights to the underlying index, while achieving all the climate
objectives (see Exhibit 12).
Exhibit 12: S&P PACT Index Constraints Relative to the Underlying Benchmark
26

CONSTRAINT

PAB

CTB

DATA SOURCE

TRANSITION RISK-RELATED CONSTRAINTS
Weighted Average GHG Emissions
per U.S. Dollar Invested(relative to 1.5°C budget)≤0≤0

TrucostGHG Emissions Intensity26

50% lower

30% lower

TrucostWACI must stay below the 7%
year-on-year trajectory

WACI must stay below the 7% yearon-year trajectory

TrucostIncrease collective index weight of
all companies with SBTs by 20%
overall27

Increase collective index weight of
all companies with SBTs by 20%
overall

Trucost/SBTi

Fossil Fuel Reserve Exposure

80% lower

No higher

TrucostEnvironmental Score

20% higher

No lower

S&P DJI ESG Scores

Maintain at least same proportion

Maintain at least same proportion

TrucostCapped at x 1.1

Capped at x 1.1

TrucostDecarbonization Trajectory(adjusted for enterprise value
growth).
Exposure to Companies with
Science-Based Targets(based on 1.5˚C scenario and 7%
decarbonization)

Revenue from High Climate Impact
Sectors27
Weight of Non-Disclosing
Companies

PHYSICAL RISK-RELATED CONSTRAINTS
Physical Risk Exposure

10% lower

No higher

TrucostPhysical Risk Cap

Dynamic cap based on the level ofphysical risk of each stock

Dynamic cap based on the level ofphysical risk of each stock

Trucost

4x higher

No lower

TrucostConstituent Weights

±2%

±2%

-

Minimum Weight

0.01%

0.01%

-

OPPORTUNITY-RELATED CONSTRAINTS
Green-to-Brown Revenue Sharefrom Power Generation
INDEX CONSTRUCTION RULES

Company weight capped based on
Company weight capped based on
an investment of EUR 1 billion andan investment of EUR 1 billion andthe length of time it would take tothe length of time it would take to
Liquidity
trade, based on the company’s
trade, based on the company’s
three-month median daily value
three-month median daily value
tradedtradedIndividual stock weights capped at
Individual stock weights capped atDiversification
5%5%
Source: S&P Dow Jones Indices LLC. Table is provided for illustrative purposes.

-

-

26

Calculated using weighted average carbon intensity (WACI), which is measured as tCO2e divided by enterprise value including cash
(EVIC), based on Trucost emissions data that account for all scopes 1, 2, and 3 emissions from inception.

27

High climate impact sectors are defined by The EU Technical Expert Group on Sustainable Finance (2019).

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June 2020

RESULTS AND PERFORMANCEOn April 20, 2020, thefirst S&P PACT Indiceswere launched…

On April 20, 2020, the first S&P PACT Indices were launched—including
the S&P Eurozone LargeMidCap PA Index and S&P Eurozone
LargeMidCap CT Index.28 The following sections explore the climate
impacts and performance of the first indices from the series.

GHG Emissions Intensity
Exhibit 13 illustrates the GHG emissions intensity of the S&P Eurozone
LargeMidCap and the S&P Eurozone LargeMidCap PA Index, against the
decarbonization trajectory as proposed by the EU’s minimum standards for
PABs.
Exhibit 13: GHG Emissions Intensity over Time versus the Proposed
Decarbonization Trajectory
WACI (tCO2e/EVIC)

1000…including the S&P
Eurozone LargeMidCap
PA Indices…

800
600
400
200

…which satisfied bothcriteria of a 50% lower
GHG emissions intensity
than the underlying index
and a 7% year-over-year
self-decarbonization
trajectory.

Feb. 2020

Dec. 2019

Oct. 2019

Aug. 2019

Jun. 2019

Apr. 2019Feb. 2019

Dec. 2018

Oct. 2018

Aug. 2018

Jun. 2018

Apr. 2018

Feb. 2018

Dec. 2017

Oct. 2017

Aug. 2017

Jun. 2017

Apr. 2017

Feb. 2017

Dec. 2016

0

S&P Eurozone LargeMidCap
Proposed Trajectory for Achieving EU PAB Label
S&P Eurozone LargeMidCap PA Index
Source: S&P Dow Jones Indices LLC. Data as of March 2020. Weighted average carbon intensity(WACI) is inflation adjusted using quarterly average weights and measured as tCO2e divided byenterprise value including cash (EVIC), based on Trucost emissions data that account for all scopes 1,
2, and 3 emissions from inception. Chart is provided for illustrative purposes and reflects hypothetical
historical performance. Please see the Performance Disclosure at the end of this document for more
information regarding the inherent limitations associated with back-tested performance.

As Exhibit 13 shows, the S&P PA Indices Methodology satisfied bothcriteria of: (1) a 50% lower GHG emissions intensity than the underlying
benchmark and (2) a 7% year-on-year self-decarbonization trajectory.
The first quarter of 2020 proved a stern test for the S&P PACT IndicesMethodology, due to high levels of market volatility, causing falling EVIC,
the denominator used for calculating the GHG emissions intensity. Over
this period, the EVIC fell by 14%. Controlling for fluctuating EVIC
minimizes market impact on the 7% year-on-year self-decarbonization,
allowing company emissions to drive the decarbonization, rather than EVIC
itself. Thus, despite the volatility over this period, this approach enabled
the S&P Eurozone LargeMidCap PA Index to satisfy both criteria.

28

The S&P PACT Indices will additionally include PA and CT versions of other widely tracked regional and country-specific indices in Europe,
the U.S., and developed markets.

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Transition to a 1.5°C World with the S&P PACT Indices

June 2020

Index Exclusions

The S&P PACT Indices
are designed to track thebenchmark index as
closely as possible.

As of the index launch in April 2020, 173 of the 254 constituents of the S&P
Eurozone LargeMidCap were included in the S&P Eurozone LargeMidCap
PA Index. Of these 173 constituents, 39 were ineligible due to the
exclusion criteria. Exhibit 14 highlights the rationale for each of theseexclusions. The remaining 43 companies were not selected due to theirinability to align with the various climate goals of the index, which means
their optimized weights would not meet the required 1 basis point threshold.
Exhibit 14: Baseline and Activity-Related Exclusions from the S&P Eurozone
LargeMidCap PA Index
Controversial Weapons
UNGC
TobaccoMSA
Arabesque Universe
Sustainalytics Universe
Coal Activities
Oil Activities
Natural Gas Activities
Power Generation

4

7

1
5

11
14
2

1

Source: S&P Dow Jones Indices LLC. Chart is provided for illustrative purposes.

Risk and Return
The S&P PACT Indices are designed to track the underlying benchmark as
closely as possible, while simultaneously satisfying all constraints outlined
in Exhibit 12. For the S&P Eurozone LargeMidCap PA Index, the strategy
exhibited 1.64% of tracking error with excess returns of 2.05% comparedwith the underlying benchmark over the past year (see Exhibits 15 and 16).
Exhibit 15: Historical Total Returns
140

S&P Eurozone LargeMidCap
S&P Eurozone LargeMidCap CT Index
S&P Eurozone LargeMidCap PA Index

130

Index Level

Both of the S&P PACT
Indices outperformed the
S&P Eurozone
LargeMidCap over the
past one-year period andsince inception.

120
110
100
90

Apr. 2020Feb. 2020

Dec. 2019

Oct. 2019

Aug. 2019

Jun. 2019

Apr. 2019Feb. 2019

Dec. 2018

Oct. 2018

Aug. 2018

Jun. 2018

Apr. 2018

Feb. 2018

Dec. 2017

Oct. 2017

Aug. 2017

Jun. 2017

Apr. 2017

Feb. 2017

Dec. 2016

80

Source: S&P Dow Jones Indices LLC. Data as of April 30, 2020. Index performance based on total
returns in EUR. Chart is provided for illustrative purposes and reflects hypothetical historicalperformance. Please see the Performance Disclosure at the end of this document for more information
regarding the inherent limitations associated with back-tested performance.

Both of the S&P PACT Indices outperformed the S&P Eurozone
LargeMidCap over the past one-year period and since inception (seeExhibit 16). Risk-based active return attribution showed 85% of the S&P
Eurozone LargeMidCap PA Index’s outperformance may be explained by a
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Transition to a 1.5°C World with the S&P PACT Indices

June 2020

specific effect—that is, returns that cannot be explained by risk model
factors. This unexplained alpha could be explained by a compensated risk
premium associated with the S&P PACT Indices’ Methodology, otherfactors not incorporated in the risk model used, or other sources. A similarstory was true of the S&P Eurozone LargeMidCap CT Index, although ahigher percentage of active returns can be explained by the risk factors.
Exhibit 16: Risk/Return Characteristics

The potentially disastrous
impacts associated withrising global
temperatures underscorethe importance of climate
action.

CHARACTERISTIC

S&P EUROZONES&P EUROZONES&P EUROZONELARGEMIDCAP LARGEMIDCAP CT INDEX LARGEMIDCAP PA INDEXANNUALIZED RETURN
One-Year (%)-14.64-12.11-12.59

0.03

0.90

0.59

One-Year (%)

-

2.53

2.05

Since Inception (%)

-

0.87

0.56

One-Year (%)

26.40

25.38

25.39

Since Inception (%)

17.39

16.83

16.95

One-Year (%)

-

2.13

2.36

Since Inception (%)

-

1.37

1.64

-

15.92

29.62

Since Inception (%)
EXCESS RETURN

VOLATILITYTRACKING ERROR

Investors and othermarket participants
therefore have a criticalrole to play when it
comes to financing a lowcarbon transition

OTHER CHARACTERICS
Active Share (%)

Stock Count
255
215
173
Source: S&P Dow Jones Indices LLC. Data as of Jan. 1, 2020. Attribution has been calculated using
Axioma risk models. Index performance based on total returns in EUR. Past performance is no
guarantee of future results. Table is provided for illustrative purposes and reflects hypothetical historicalperformance. Please see the Performance Disclosure at the end of this document for more information
regarding the inherent limitations associated with back-tested performance.

CONCLUSIONThe S&P PACT Indicessupply the market withsustainable versions of
S&P DJI benchmarksthat are designed to aligninvestments with a 1.5°C
scenario and to achieve
net-zero emissions by
2050.

INDEX EDUCATION | ESG

The potentially disastrous impacts associated with rising global temperatures
underscore the importance of climate action. Investors and other market
participants therefore have a critical role to play when it comes to financing a
low-carbon transition. Regardless, the perils of climate change represent
financially material risks for investor portfolios that need to be managed. To
that end, the S&P PACT Indices supply the market with sustainable versionsof S&P DJI benchmarks that are designed to align investments with a 1.5°C
scenario and achieve net-zero emissions by 2050. The indices draw upon
S&P Global’s market-leading environmental data and models to not only
meet but exceed new technical standards proposed by the EU for ParisAligned and Climate-Transition Benchmarks, as well as TCFD
recommendations—by accounting for the physical risks, transition risks, andfinancial opportunities arising from climate change. Numerous climate
objectives are simultaneously incorporated while minimizing deviations fromthe underlying benchmark, resulting in broad, diversified exposure. The S&P
PACT Indices thus provide a formidable new investor toolkit for adhering toour collective “pact” of transitioning to a 1.5°C world.
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June 2020

WORKS CITED
Armour, K. C., Marshall, J., Scott, J. R., Donohoe, A., & Newsom, E. R. (2016). Southern Ocean Warming
Delayed by Circumpolar Upwelling and Equatorward Transport. Nature Geoscience, 9, 549-554.
Byers et al. (2018). Global exposure and vulnerability to multi-sector development and climate change
hotspots. IOP Science.
Carbon Tracker. (2011). The Carbon Bubble.
Keenan, T. F., Prentice , I. C., Canadell, J. G., Williams, C. A., Wang , H., Raupach , M., & Collatz , G. J.
(2016). Recent pause in the growth rate of atmospheric CO2 due to enhanced terrestrial carbon
uptake. Nature Commun, 7:13428.
Krabbe, O., Linthorst, G., Blok, K., Crijns-Graus, W., van Vuuren, D., Höhne, N., . . . Pineda, A. C. (2015).
Aligning Corporate Greenhouse-Gas Emissions Targets with Climate Goals. Nature Climate
Change.
Masson-Delmotte, V., Zhai, P., Pörtner, H. O., Roberts, D., Skea, J., Shukla, P. R., . . . Waterfield, T. (2018).
Global warming of 1.5°C. An IPCC Special Report on the impacts of global warming of 1.5°C. IPCC.
Mengel, M., & Levermann, A. (2014). Ice Plug Prevents Irreversible Discharge From East Antarctica. Nature
Climate Change, 4, 451-455.
NOAA National Centers for Environmental Information. (2020). State of the Climate: Global Climate Reportfor January 2020. NOAA. Retrieved from https://www.ncdc.noaa.gov/sotc/global/202001
Randers, J. (2012). Greenhouse gas emissions per unit of value added (“GEVA”) – A corporate guide tovoluntary climate action. Journal Energy Policy .
Rogelj, J. D. (2018). Mitigation Pathways Compatible with 1.5°C in the Context of Sustainable Development.
Retrieved from Intergovernmental Panel on Climate Change:
https://www.ipcc.ch/site/assets/uploads/sites/2/2019/02/SR15_Chapter2_Low_Res.pdf
Science Based Targets Initiative. (2019, April). Science-Based Target Setting Manual. Retrieved fromhttps://sciencebasedtargets.org/wp-content/uploads/2017/04/SBTi-manual.pdf
Steffen, W., Rockström, J., Richardson, K., Lenton, T. M., Folke, C., Liverman, D., . . . Schellnhuber, H. J.
(2018). Trajectories of the Earth System in the Anthropocene. PNAS, 115(33), 8252-8259.
SustainAbility. (2019). Rate the Raters 2019: Expert View on ESG Ratings.
TCFD. (2017). Final Report: Recommendations of the Taskforce on Climate Related Financial Disclosures.
Temperatures | Climate Action Tracker. (2019, December 10). Retrieved from Climate Analytics and
NewClimate Institute: https://climateactiontracker.org/global/temperatures/
The EU Technical Expert Group on Sustainable Finance. (2019). TEG Final Report on Climate Benchmarks
and Benchmarks’ ESG Disclosures.
Trucost. (2019). Trucost Scenario Alignment Model.
UNFCCC. (2015). The Paris Agreement.

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PERFORMANCE DISCLOSURE
The S&P Eurozone LargeMidCap Paris-Aligned Climate Index and S&P Eurozone LargeMidCap Climate Transition Index were launched April
20, 2020. All information presented prior to an index’s Launch Date is hypothetical (back-tested), not actual performance. The back-test
calculations are based on the same methodology that was in effect on the index Launch Date. However, when creating back-tested history forperiods of market anomalies or other periods that do not reflect the general current market environment, index methodology rules may berelaxed to capture a large enough universe of securities to simulate the target market the index is designed to measure or strategy the index isdesigned to capture. For example, market capitalization and liquidity thresholds may be reduced. Complete index methodology details areavailable at www.spdji.com. Past performance of the Index is not an indication of future results. Prospective application of the methodology
used to construct the Index may not result in performance commensurate with the back-test returns shown.
S&P Dow Jones Indices defines various dates to assist our clients in providing transparency. The First Value Date is the first day for which
there is a calculated value (either live or back-tested) for a given index. The Base Date is the date at which the Index is set at a fixed value forcalculation purposes. The Launch Date designates the date upon which the values of an index are first considered live: index values provided
for any date or time period prior to the index’s Launch Date are considered back-tested. S&P Dow Jones Indices defines the Launch Date as
the date by which the values of an index are known to have been released to the public, for example via the company’s public website or its
datafeed to external parties. For Dow Jones-branded indices introduced prior to May 31, 2013, the Launch Date (which prior to May 31, 2013,
was termed “Date of introduction”) is set at a date upon which no further changes were permitted to be made to the index methodology, butthat may have been prior to the Index’s public release date.
The back-test period does not necessarily correspond to the entire available history of the Index. Please refer to the methodology paper for theIndex, available at www.spdji.com for more details about the index, including the manner in which it is rebalanced, the timing of such
rebalancing, criteria for additions and deletions, as well as all index calculations.
Another limitation of using back-tested information is that the back-tested calculation is generally prepared with the benefit of hindsight. Backtested information reflects the application of the index methodology and selection of index constituents in hindsight. No hypothetical record cancompletely account for the impact of financial risk in actual trading. For example, there are numerous factors related to the equities, fixedincome, or commodities markets in general which cannot be, and have not been accounted for in the preparation of the index information set
forth, all of which can affect actual performance.
The Index returns shown do not represent the results of actual trading of investable assets/securities. S&P Dow Jones Indices LLC maintains
the Index and calculates the Index levels and performance shown or discussed, but does not manage actual assets. Index returns do notreflect payment of any sales charges or fees an investor may pay to purchase the securities underlying the Index or investment funds that are
intended to track the performance of the Index. The imposition of these fees and charges would cause actual and back-tested performance ofthe securities/fund to be lower than the Index performance shown. As a simple example, if an index returned 10% on a US $100,000
investment for a 12-month period (or US $10,000) and an actual asset-based fee of 1.5% was imposed at the end of the period on theinvestment plus accrued interest (or US $1,650), the net return would be 8.35% (or US $8,350) for the year. Over a three year period, anannual 1.5% fee taken at year end with an assumed 10% return per year would result in a cumulative gross return of 33.10%, a total fee of US$5,375, and a cumulative net return of 27.2% (or US $27,200).

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GENERAL DISCLAIMER
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This document does not constitute an offer of services in jurisdictions where S&P Dow Jones Indices LLC, S&P, Dow Jones or their respective
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