STOXX has introduced the ISS STOXX Net Zero Transition indices, a next-generation, optimized set focused on net-zero targets, real-world transition-aligned metrics, and encompassing of all industries included in the parent universe.
The indices are versions of established benchmarks such as the STOXX® World AC, STOXX® Developed World and STOXX® Europe 600 and follow the International Energy Agency’s Net-Zero Pathway, seeking alignment with the 2050 carbon budget by 2040, based on the ISS ESG scenario alignment toolkit. They incorporate sector-specific performance indicators, and include systematically important companies from high-emitting sectors that play a crucial role in the climate transition.
The new suite of indices is aligned with net-zero frameworks developed by investor groups in the financial sector, and complements STOXX’s existing offering of Climate, EU Climate Transition Benchmarks (CTBs) and EU Paris-aligned Benchmarks (PABs) indices. They stand out for their inclusion of all key industries, integration of forward-looking metrics, and are designed to encourage stewardship, while keeping expected tracking error below 1%.
| Key features of the ISS STOXX Net Zero Transition indices • Real-world aligned decarbonization metrics (including sector-specific year-on-year emissions reduction and share of green revenues) • Forward-looking metrics • Exposure to high-impact sectors • Governance and disclosure (including climate risk and audit reports) |
The background
Indices have played a vital role in directing flows towards climate strategies.[1] With a growing need to align with global warming targets, and reaping a wealth of experience in first-generation low-carbon strategies, investors have called for stepping up existing climate indices. Today, many investors demand indices that align with or incentivize real-world impact, rather than just decarbonize portfolios, by allocating capital to those companies that are key to the transition and have announced vetted decarbonization plans.
Such calls were recently crystallized in initiatives by the Glasgow Financial Alliance for Net Zero (GFANZ) and the UN-convened Net-Zero Asset Owner Alliance, which aimed to kickstart the design of new climate indices that can help support a true and just low-carbon transition. The ISS STOXX Net Zero Transition indices are aligned in spirit with both protocols.
The work so far
Since launching the Low Carbon and Climate Change indices series in 2016, STOXX has been a global pioneer of climate indices.
We introduced the PABs and CTBs in 2020, shortly after the European Union Climate Benchmarks regulation came to be. Across the broader market, EU Climate Benchmarks have been called “a resounding success.”[2] According to Morningstar Direct, 73% of the USD 234 billion that was invested in climate transition funds globally by September 2024 was in trackers of either a PAB or a CTB.
Supported by the success of those climate indices, investors have called on to take further steps in that direction.
One first demand came from the realization that real transition portfolios should include heavy-emitting sectors. By allocating to those businesses, investors can get an opportunity for engagement and stewardship, and companies are provided the financial leverage needed for decarbonization projects.
A related objective is to include companies based on credible low-carbon transition plans, and not penalize high emitters at the early stages of their transition paths.
Enhanced index tools
Addressing those two points was central to the design of the ISS STOXX Net Zero Transition indices.
The indices include, and not underweight, sectors including energy, utilities, transportation and materials. Instead, within these sectors, companies that show a higher proportion of transition-aligned revenues are overweighted. The industry allocation recognizes the specific decarbonization requirements of different economic sectors and integrates sector-specific key performance indicators and science-based targets.
Another characteristic of the new indices that has proved important for investors in the past is having low tracking error to parent benchmarks.
Figure 1 shows the criteria, requirements and constraints involved in the construction of the ISS STOXX Net Zero Transition indices.
Figure 1: Index building
ISS ESG Screens
Additionally, the indices exclude companies in breach of global norms and those involved in controversial activities. They also incorporate a thermal coal phase-out: developed-market companies with any coal-mining exposure will be removed by 2030, and emerging-market ones with similar exposure will be excluded by 2040. Companies with the top 100 reserves of thermal coal are also removed.
Also excluded are companies investing in new oil and gas fields, natural gas plants and coal mines.
Finally, the ISS STOXX Net Zero Transition indices are aligned with ESMA’s fund naming guidelines and comply with SFDR requirements.
“As a company that has consistently embraced innovation and advanced sustainability solutions, ISS STOXX supports our clients’ calls to develop indices that are inclusive of all sectors that are key to the low-carbon transition, and that are forward-looking in nature,” said Saumya Mehrotra, Index Product Management, at STOXX. “The idea of having a more mature framework for climate indices is a natural progression in a journey.”
Climate performance
Figure 2 shows comparative metrics for the ISS STOXX® World AC Net Zero Transition index against its parent, the STOXX World AC index. The Net Zero index improves the carbon intensity profile of the portfolio by 37% relative to the starting universe. Not surprisingly, the net-zero alignment is increased by 25%.
Other metrics significantly improved include carbon risk, climate risk disclosure and climate targets.
Figure 2: Climate performance of the ISS STOXX World AC Net Zero Transition index against benchmark
“This new offering will further stimulate investments into climate funds, and help asset managers and asset owners raise their stakes in a fair and real low-carbon transition,” said Antonio Celeste, Head of Sustainability, Index Product Management, at STOXX.
A new era for climate indices?
Advances in research and technology are helping the design of enhanced climate-focused portfolios. Inputs needed to build financial portfolios around a material transition include forward-looking metrics, varying scenarios, biodiversity impact and net-zero alignment.
Guided by the positive experience from the first set of climate indices, the investment community is stepping up efforts to reach the 1.5°C global warming goal by 2050. ISS STOXX is excited to join partners and the broader industry in achieving the low-carbon transition.
[1] According to Morningstar Direct, there were USD 234 billion invested in climate transition funds globally by September 2024.
[2] Source: Responsible Investor, “EU climate benchmarks: still in vogue?” November 5, 2024.