Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.Copyright (c) 2006 Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.
Low Carbon Index Investing
David M. BlitzerManaging Director &Chairman of the Index Committee
Standard & Poor’s
May 6, 2009
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Topics
• Developing Low Carbon Indices
• Investing for real people
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Low Carbon Indices
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Developing Low Carbon Indices - 1
• Stock screening/elimination
– Stocks with high carbon footprints are removed from the portfolio whilemaintaining approximate sector neutrality
– Between 20% and 35% of the names are dropped
• Tracking Error Optimization
– Remaining stocks are re-weighted using an optimizer to minimizetracking error against the original portfolio
• Based on the S&P 500 model
– Carbon reduction of 48%
– Tracking error of 96 bp
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Developing Low Carbon Indices - 2
• Optimizer is used to achieve a targeted reduction inthe average carbon foot print across the index
• Results are tabulated to generate a trade-off curvebetween carbon reduction and increased trackingerror.
• The investor can choose the degree of tracking errorto accept in achieving the carbon reduction.
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Trade off between carbon reduction and tracking error
0
100
200
300
400
500
0.0 0.5 1.0 1.5 2.0 2.5 3.0
Carbon foot print(GHG per revenue)%
reduction
0
70
Tracking error (%)
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Low Carbon Indices
• On March 9th, S&P launched the S&P U.S. Carbon EfficientIndex based on the S&P 500
• Deutsche Bank licensed the index from S&P to create financialproducts offering carbon efficient investments
• S&P is developing a Low Carbon investable index coveringemerging markets based on the S&P/IFCI Investable Index
• The emerging market index is supported by the InternationalFinance Corporation of the World Bank.
• Carbon data provided by Trucost Ltd.
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Investing with Indices
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Indices Outperform Active Managers
Indices Outperformed ActivelyManaged Funds
89.883.965.1Emerging Market stocks
58.848.850.0Non-U.S. Small Cap Stocks
83.576.564.0Non-U.S. stocks
63.264.059.8Global stocks
85.478.083.8Small Cap U.S. stocks
79.170.174.7Mid Cap U.S. stocks
71.9%64.8%54.3%Large Cap U.S. stocks
5 Years3 YearsOne Year
Source: Standard & Poor’s Index vs. Active; see www.SPIVA.Standardandpoors.com
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Indices Work
• Index investing offers lower costs and fees
• Investments are transparent
• Investments can be understood
Carbon indices offer investors anefficient way to reduce the carbon
footprint of their portfolio
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Thank You
David M. [email protected]
+1 212 438 3907
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