“Yes, there are two paths you can go by, but in the long run
There’s still time to change the road you’re on.”
—Jimmy Page and Robert Plant
Many observers assume indices targeting broad ESG performance follow different paths than those delivering climate-focused temperature alignment. In reality, data show that modern indices can often achieve both objectives, helping investors to stride confidently down a single path of sustainability.
The S&P/B3 Brazil ESG Index measures the performance of securities meeting sustainability criteria and weights constituents based on companies’ ESG performance resulting from the Corporate Sustainability Assessment (CSA) conducted by S&P Global Sustainable1.1
The index is not explicitly designed to target improved temperature alignment (a transition pathway assessment that examines the adequacy of emission reduction over time in meeting a 2°C carbon budget). However, it does address net zero energy transition objectives by applying exclusionary screenings based on business activities including thermal coal mining, coal-powered electricity generation, fossil fuel extraction and/or production using oil sands. Furthermore, under the environmental pillar of S&P Global ESG Scores, including criteria such as climate strategy and environmental policy and management, the index integrates financially relevant climate risks and opportunities.
Even without an explicit temperature alignment target, S&P DJI’s Q1 2024 Sustainability Index Dashboard shows the S&P/B3 Brazil ESG Index achieved 1.5°C alignment and was 65% under its 2°C carbon budget versus the S&P Brazil BMI, which was 38% under. Such a significant result is typically only achieved in sophisticated climate indices with explicit temperature alignment targets like the S&P PACT™ Indices (S&P Paris-Aligned & Climate Transition Indices).
Exhibit 1 summarizes the sectoral contribution of the S&P/B3 Brazil ESG Index to its -65% under 2°C carbon budget status compared to the S&P Brazil BMI. A negative percentage signifies a sector’s carbon emissions are under budget, while a positive percentage indicates its carbon emissions are over budget.
Materials was the largest contributor (-53%) to achieving -65% under 2°C carbon budget, followed by Consumer Discretionary (-17%). Energy, Consumer Staples and Utilities detracted 5% total from the carbon budget. Similarly, for the S&P Brazil BMI, Materials and Consumer Discretionary led the achievement of -38% under the 2°C carbon budget, with -35% and -24%, respectively. But these contributions were countered by Energy (13%) and Utilities (7%).
As technological developments meet sustainability considerations, the global energy system is experiencing a profound transformation. Considering the S&P/B3 Brazil ESG Index’s strong temperature alignment, we evaluated types of energy generated by constituent companies (see Exhibit 2).
Impressively, 97% of energy generated by the S&P/B3 Brazil ESG Index constituents came from renewable sources compared to 88% for the S&P Brazil BMI. Only 2% of generated energy came from fossil fuels, including natural gas. This is also reflected in the index’s 82% improvement in fossil fuel reserves compared to the S&P Brazil BMI, according to S&P DJI’s Q1 2024 Sustainability Index Dashboard.
The S&P/B3 Brazil ESG Index’s strong temperature alignment and energy transition outcomes could make it an interesting option for investors with multiple sustainability considerations in mind.
1 For more information, please see the S&P/B3 Indices Methodology.
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