German index provider Solactive has released a 2-degree index, which calculates the contribution of companies to climate change under different scenarios up to 2050.
The Solactive right. 2 degree-aligned Europe Index applies the X-Degree Compatibility (XDC) Model, which calculates the amount of emissions a company’s value creation is associated with, Expert Investor was told in February.
“The XDC is a forward-looking indicator, taking relevant scenarios such as corporate climate targets into account,” said a Solactive spokesperson, adding that the EU’s Paris-Aligned Benchmark (PAB) is based on backward-looking emission intensity and does not give room for considering possible changes.
A PAB-based index “focuses more on the change of emissions over the whole portfolio over time, while an XDC-based index focuses on a company’s level of emissions compared to a predefined target until 2050”, the spokesperson added.
As the index is weighted by free-float market capitalisation, the temperature alignment does not impose a certain weighting scheme.
Additionally, Solactive said that the index has a real-economy focus as it uses gross value added as an economic indicator for the emissions activity of a company.
The PAB, however, applies enterprise value as the denominator for emission intensities, which means that these can be heavily distorted by aspects that do not change real emissions, the spokesperson explained.
Selection of holdings
The index has been developed in partnership with Frankfurt-based start-up Right Based on Science, a climate metrics and software provider.
Companies are selected from a broad range of sectors aligned with a 2°C scenario under baseline assumptions through 2050 out of the Solactive Europe 600 Index, which tracks the price movements of the 600 largest companies in the European market.
When creating the index, Solactive found that more than 57% of those companies were not suitable as they lacked 2°C-aligned business practices.
Steffen Scheuble, chief executive of Solactive, said that “we are looking forward to disrupting the index business and the way people invest in a greener future with Right [Based on Science] even more going forward”.
Hannah Helmke, co-founder and chief executive of Right Based on Science, commented: “Our aim in creating the XDC Model was to provide a transparent, tangible climate impact metric that can be used by financial actors, the real economy and other market participants alike.”
In February, Solactive bought a minority stake in Right Based On Science to strengthen its strategic partnership.