The voluntary guidance aims to understand how index investing can support companies’ transition to net zero

Toronto, Canada, 9 October 2024 – Today, the Glasgow Financial Alliance for Net Zero (GFANZ) launched a public consultation paper on voluntary guidance on the development of “transition-informed” indices to support the global transition to net zero. The consultation paper – ‘Index Guidance to Support Real-Economy Decarbonisation’ – has been developed by the GFANZ Index Investment Workstream, which is co-led by LGIM, PKA, and SGX Group.

A significant portion of publicly traded equity as well as corporate bonds use indices, either as a benchmark for active managers or for index investment strategies. Global investors use indices when designing both index and active strategies, making investment decisions, and tracking performance. As a result, index design will significantly impact the financial sector’s ability to deliver the transition finance required to achieve the goals of the Paris Agreement.

Today, the majority of climate-related indices often do not directly support real-economy decarbonisation, because they do not recognise companies’ climate strategies, their design excludes heavy emitting industries, or they require year-on-year emissions reduction that is hard for companies to deliver and may be challenging for active and index managers to implement. As there are few companies that have either achieved net zero, provide climate-solutions, or are fully aligned with a net zero pathway, this makes it challenging for indices to support real-economy decarbonization.

The consultation paper outlines potential guidance index participants (index providers, data providers, stock exchanges, asset owners, asset managers and other investors) may take to voluntarily and independently develop and adopt indices that support real-economy decarbonisation. Known collectively as “transition-informed” indices, these new index categories include:

• “Transition-potential” indices include companies that demonstrate the potential to align with the net-zero transition in a time-bound manner as well as those companies that are included in “transition-engaged” indices.
• “Transition-engaged” indices include companies that are “In development”, Aligning or Aligned to net zero, or are a Climate Solution.
• “Net-zero” indices that only include companies that are Aligned or a Climate Solution.

Index providers may voluntarily and independently design these new categories of indices to align with the global goal of achieving net-zero greenhouse gas emissions by 2050, helping global markets align with the goals of the Paris Agreement. The consultation paper proposes draft guidance to help index participants develop and adopt these “transition-informed” indices, creating a pathway for index participants to engage with companies now and help support companies’ real-economy decarbonization.

The consultation paper aims to provide: a rationale for “transition-informed” indices, working towards alignment with a real-economy transition to net zero by 2050; voluntary guidance for index participants on the development and implementation of such indices; and identifies further areas of work required, particularly around improvements in data availability, quality, and comparability. With improved access to climate data, these indices go beyond the goal of reducing the carbon footprint of an investment portfolio, to that of supporting real-economy transition to a low-carbon economy over time.

The paper underscores the importance of integrating climate data – in particular forward-looking data like Expected Emissions Reductions (EER) and net zero transition plans, engaging in proactive engagement, and employing innovative index design to drive real-economy decarbonisation. Ultimately, the transition to a sustainable economic future depends on the collaborative action of index participants, companies, and policymakers. The voluntary guidance in this paper aims to support an accelerated transition to net zero.

The consultation is open for 3 months until January 9th, 2025, and feedback received will inform the final paper, which will be released in late Q1 2025. Feedback from all stakeholders will be considered and can be provided here.