GFANZ launches indices consultation paper

Glasgow Financial Alliance for Net Zero (GFANZ) has 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 decarbonisation.

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 consultation is open for three months until 9 January 2025, and feedback received will inform the final paper, which will be released in late Q1 2025. Feedback can be left here.