Considering the Risk From Future Carbon Prices: The S&P Carbon Price Risk Adjusted Index Series

Categories: Industry/Sector Analysis, General Market Analysis, ESG, Investor Education, Equity Investments

Country or region: Asia Pacific (Overall)

S&P Dow Jones Indices launched the S&P Carbon Price Risk Adjusted Indices to embed future carbon price risk into today’s index constituents, an example of the broader move toward incorporating ESG considerations in asset management.

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Along with the advent of the 2015 Paris Climate Agreement has come a growing understanding of the structural changes required across the global economy to shift to low- (or zero-) carbon, sustainable business practices.

The increasing regulation of carbon emissions through taxes, emissions trading schemes, and fossil fuel extraction fees is expected to feature prominently in global efforts to address climate change. Carbon prices are already implemented in 40 countries and 20 cities and regions. Average carbon prices could increase more than sevenfold to USD 120 per metric ton by 2030, as regulations aim to limit the average global temperature increase to 2 degrees Celsius, in accordance with the Paris Agreement. 

S&P Dow Jones Indices launched the S&P Carbon Price Risk Adjusted Indices to embed future carbon price risk into today’s index constituents. The Indices are intended to address the question of future company-specific risks associated with the increasing cost of carbon emissions.

In so doing, the indices seek to:

1. Support the recommendations of the Task Force on Climate-related Financial Disclosures to price climate-related risks in investment decision-making;

2. Show how companies can be weighted in different ways according to their emissions, but with a forward-looking, financial cost perspective;

3. Highlight how historically a company’s level and geographic spread of carbon emissions have not substantially affected performance; and

4. Show the difference that may be made in the future from a company’s ability to manage its carbon pricing risk exposure. 

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