Qontigo and Willis Towers Watson have launched a family of climate transition indices driven by a next generation methodology that directly quantifies the impact of a Paris-aligned climate transition on equity valuations.
The STOXX Willis Towers Watson Climate Transition Indices (CTI) help investors, governments and companies to manage risk, capture opportunities in their portfolios, align with the goals of the Paris agreement and work towards Net Zero targets.
The CTI enables a more sophisticated way of managing climate risk, that looks beyond carbon emissions, by making a forward-looking, bottom-up evaluation of transition risk and opportunity for each company. A proprietary Climate Transition Value at Risk (CTVaR) measure analyses the impact on projected company cashflows of moving from a ‘business as usual’ scenario – reflecting current policies – to a world where emissions pathways are fully aligned to the goals of the Paris agreement.
By incorporating climate risk explicitly, this innovative approach allows investors to allocate in a robust, transparent, and low-cost manner towards firms that will build – and benefit from – a future global economy that values and manages climate risks.
In addition to the launch of the index, AMX (the “Asset Management Exchange”) an affiliate of Willis Towers Watson is launching a UCITS fund, which will track the STOXX Willis Towers Watson World Climate Transition Index. Willis Towers Watson has partnered with EOS at Federated Hermes, a market leading stewardship provider, to deliver voting and engagement services for the fund. Climate change is a key focus area for EOS’ engagement.
The fund, which will be available to DB and DC pension plans in multiple countries, is anticipated to receive in the region of USD1 billion by the end of 2021.
Craig Baker, Willis Towers Watson’s Global Chief Investment Officer, says: “Investors need a robust framework that can quantify and incorporate the financial impact of climate risk, but this is something that just hasn’t been widely available until now. We believe that understanding this transition, through our Climate Transition Value at Risk methodology (CTVaR), should be one of the biggest sources of alpha across all asset classes over the next few years. This new fund will be a valuable tool for pension plans to both reduce their climate risk and take advantage of the opportunities thrown up by a transition to a Paris-aligned world. Climate change is a systemic and urgent global challenge and also one that will significantly disrupt capital allocations and returns.”
David Nelson, Climate Transition Analytics Senior Director, Willis Towers Watson, says: “By curating data from multiple sources, the CTI takes a unique approach by refreshing forward-looking company transition risk over time rather than simply using historic carbon emissions data. Whilst current climate metrics can help to identify outliers, many of the current approaches to factoring climate risk into investments tend to be simplistic and fall short of accurately identifying their impact on company valuations.”
Stephan Flaegel, Chief Product Officer, Index for Qontigo, says: “Understanding and addressing climate transition risk is essential to investment decisions today. Together with Willis Towers Watson, we took a collaborative approach to bring an innovative solution to market, translating the Willis Towers Watson CTVaR model into a transparent, rules-based index solution.