Fund Rating Methodology

Transcription

1 Fund Rating Methodology CDP Europe May 2018 For feedback or any other queries, please contact Nico Fettes, CDP Europe

2 Contents 1. Introduction Rating outcome Methodology overview Rating calculation Scoring levels Asset manager score Fund investment policy score Portfolio holdings score The fund universe Frequency of calculations... 9 Annex 1: Asset Manager Score Indicators, weights and data sources Annex 2: Company scores Indicators, weights and data sources Annex 3: Deforestation score Indicators and weights Annex 4: Sector tilting multiples Annex 5: Sector overlay calculations

3 1. Introduction Climate change has become a key environmental concern for many investors and is increasingly considered a real long-term investment risk. At the same time, the fund industry has the potential to turn into a significant lever to support the urgent transition to a low-carbon economy. Private and institutional investors need appropriate tools to assess the climate risks and opportunities of their funds. For these reasons, CDP, together with ISSclimate, developed Climetrics, which creates climate transparency in the European investment fund industry. Climetrics is calculated for actively managed funds and ETFs using the database of CSSP AG/yourSRI.com for fund information 1. The rating is symbolized by green leaves issued on a scale from one to five, with five being the best, meaning the most progressive funds in the area of monitoring and minimizing climate risks. During its pilot stage (July 2017 July 2018), only the four and five leaf rated funds are publicly disclosed. 2. Rating outcome The Climetrics rating measures the climate risks and opportunities of a fund against all other funds in its sample. The higher a fund s rating, the better its performance on climate-related risks and opportunities. Climetrics mostly measures climaterelated risks known as transition risks 2. An above average Climetrics rating (4 or 5-leafs) indicates that, on average, the companies in a fund s portfolio are: { more carbon efficient, { better at publicly disclosing and managing climate-related risks and opportunities, and { more likely to deploy key technologies supporting the energy transition 1 Climetrics may collaborate with other platform providers in the future. 2 Transitioning to a lower-carbon economy may entail extensive policy, legal, technology, and market changes to address mitigation and adaptation requirements related to climate change. Depending on the nature, speed, and focus of these changes, transition risks may pose varying levels of financial and reputational risk to organizations. (Task Force on Climate-related Financial Disclosure, 2017) 2

4 than companies in portfolios of lower rated funds. Furthermore, a 5-leaf rating indicates that the asset manager providing the fund publicly acknowledges the importance of climate-related risks and is committed to taking action on climate change. 3. Methodology overview All funds are scored across three different levels, each focusing on a different aspect of the investment process value chain (see chart 1). The primary focus is on the climate risks and opportunities of the individual holdings within each fund (as more fully described below). This is to assess actual investment decisions taken by the funds regarding climate change. To assess a fund s holdings with respect to their climate risks, a bespoke scoring methodology for companies was developed for Climetrics. Besides the holdings analysis, the Climetrics scoring methodology also includes an assessment of the asset manager s public action on climate change and rewards funds which have an explicit SRI investment policy. This intends to address different aspects of the investment process (e.g. company engagement). Chart 1: Scoring levels and corresponding weights Asset Manager Level Weight: 10% Fund Investment Policy Level Weight: 5% Portfolio Holdings Level Weight: 85% 3

5 Score Averaging The Climetrics rating captures a fund s portfolio history. All reported full holdings over the previous 12-month period 3 are included in the calculation of the portfolio holdings score. 4. Rating calculation For each fund, individual level scores are multiplied by their respective weights to calculate a numeric score on a scale from 0 to 100. To assign ratings based on these scores, a normal distribution is assumed. In addition, certain threshold criteria apply for top-rated funds (5 leafs). Based on their scores, all funds are ranked by percentile rank in descending order. The Climetrics rating is assigned as follows: Table 3: Climetrics ratings distribution Rating Percentage distribution 1 leaf Lowest 10% 2 leaf Next 22.5% 3 leaf Next 35% 4 leaf Highest 32.5% 5 leaf Threshold criteria apply Threshold criteria Funds assigned four leaves are eligible for a fifth leaf if both of the following threshold criteria are met: 3 As reported via Lipper, a Thomson Reuters company. Please note that reported holdings via Thomson Reuters Lipper vary in timing and frequency. 4

6 (1) The portfolio holdings score of the most recent portfolio must be greater than 70; and (2) The Asset Manager score must be greater or equal to Scoring levels 5.1. Asset manager score Besides portfolio construction, asset managers can take strong climate action through shareholder advocacy, public engagement and disclosure. Climetrics scores asset managers for their public action and statements on integrating climate change into their governance and investment processes. A detailed overview of the indicators applied, along with their respective weights used in the calculation of the asset manager score can be found in annex 1. A minimum asset manager score of 60 is required for any fund to be awarded with a 5-leaf rating Fund investment policy score Funds with an explicit ESG policy are considered to have a higher likelihood of good environmental stewardship and for enhanced integration of climate change factors into investment decision making. Climetrics awards fifty (50) points to funds with an explicit ESG policy as reported via the Thomson Reuters Lipper database 4. One hundred (100) points are awarded to those funds carrying any of the European SRI labels shown in table 4. 4 Based on self-reported data 5

7 Table 4: European SRI labels used at the fund investment policy level Label Name Issuer Country Label ISR French Ministry of Finance France Energy and Ecological Transition for Climate (EETC) French Ministry of the Environment, Energy and Marine Affairs France FNG Label LuxFlag Environment LuxFlag ESG LuxFlag Climate Finance Nordic Swan Ecolabel Umweltzeichen Österreich Forum Nachhaltige Geldanlagen (Gesellschaft für Qualitätssicherung Nachhaltiger Geldanlagen mbh) Luxembourg Finance Labelling Agency Luxembourg Finance Labelling Agency Luxembourg Finance Labelling Agency Ecolabelling Sweden, (state owned non-profit) Republic of Austria Germany Luxembourg Luxembourg Luxembourg Sweden Austria { 5.3. Portfolio holdings score A bespoke scoring methodology for companies was developed for Climetrics. In addition, a specific sector overlay is used to aggregate company scores at the portfolio level. Company universe More than 5,000 companies are scored according to the climate specific criteria described below. The Climetrics company universe is comprised of the 2017 CDP Climate Change sample, i.e. all companies receiving the annual climate change disclosure request on behalf of over 650 CDP investor signatories. Company scores All companies are scored for their current GHG emissions intensity and climate change management performance. In addition, certain companies are scored on climate specific criteria mostly related to fossil fuels and key low-carbon technologies (see annexes 2 and 3 for a list of indicators). 6

8 The emissions intensity score informs about the climate change-related risk inherent in a company s current business model, relative to other companies. In contrast, the climate management performance score is a future-looking proxy indicator aimed at evaluating a company s awareness and management action on climate change. Irrespective of its current level of emissions, it reflects a company s track record of disclosing metrics, risks, opportunities and performance related to climate change and, if applicable, commodity-driven deforestation. It also captures companies commitments to setting meaningful emissions reductions targets. Lastly, the assessment of certain companies in relation to fossil fuels and lowcarbon technologies looks at how companies products and services are supportive or obstructive to the required transition in the energy and transport sectors. The Emissions Intensity Score and the Climate Management Score receive an equal weight in the calculation of the Climetrics company score (see chart 1). Chart 1: Components of the Climetrics company score: base case Emissions Intensity 50% Climate Management Performance 50% If additional metrics relating to fossil fuels and key technologies apply, these metrics count double (see chart 2). Chart 2: Components of the Climetrics company score: specific metrics apply Emissions Intensity 25% Climate Management Performance 25% Fossil Fuels and Key Technology exposure 50% 7

9 Please refer to Annex 2 and 3 for a detailed description of metrics and weights used in the calculations of the sub-scores. Sector Overlay For the aggregation of company scores at the portfolio level, a sector overlay is applied. Thus, scores of companies from high (negative) impact sectors contribute more strongly to the overall portfolio holdings score than those from low impact sectors. The sector overlay is based on sub-industry analysis using the GICS classification system. All sub-industries are analyzed for the average emissions intensity of companies within the sub-industry. As a result, each sub-industry is assigned a sector tilting multiple according to the following formula: The sector tilting multiples (see Annex 4) are used to re-weight portfolio holdings across high impact industries, i.e. if the sector tilting multiple is equal or greater one (1.0). If a fund has no allocation to any company in a high impact industry, the sector tilting does not apply. Because of the sector overlay, scores of companies within high impact industries contribute more strongly to the overall portfolio holdings score than others. As a result, a fund s allocation to a company with a high score from a low impact industry (e.g. health care equipment) cannot easily compensate for an allocation of equal size to a typical company with a low score from a high impact industry (e.g. coal & consumable fuels). Please refer to Annex 5 for further details regarding the sector overlay. 8

10 6. The fund universe The Climetrics rating currently covers actively managed funds and ETFs available for sale in Europe. YourSRI.com is the service provider for all fund calculations and defines the fund universe for Climetrics. Within predefined fund peer groups, funds are selected based on funds assets under management and full holdings availability. Fund data is supplied to yoursri.com by Lipper, a Thomson Reuters company. To receive a Climetrics rating, at least 60% of a fund s assets under management must have a Climetrics company score and the latest full holdings data must be less than 12 months old. 7. Frequency of calculations The Climetrics ratings are calculated and updated on an ongoing basis and may change each time new fund holdings information or other data becomes available. It is important to note that new holdings data counts towards the calculation of the 12-month average portfolio holdings score which is used in the calculation of the final Climetrics rating. 9

11 Annex 1: Asset Manager Score Indicators, weights and data sources Category Proxy Voting 5 Collective Engagement Disclosure Commitments Corporate Disclosure Support Weight (Case 1) 0% (if not applicable) 35% 35% 15% 15% Weight (Case 2) 25% (if applicable) 26.25% 26.25% 11.25% 11.25% Member of Global Investor Coalition on Public response Climate Change (GIC) 6 to Section 13.2 of Climate metrics Aggregated level of support (in %) across funds for shareholder resolutions on climate change & the environment OR Signatory to the CDP Carbon Action Program OR the annual UN PRI reporting framework. (Consideration of climate change as Signatory to the Montreal Pledge OR Member of the Portfolio Decarbonization Coalition (PDC). Signatory to CDP Signatory to the Climate Action 100+ a long-term risk initiative or opportunity) Score 0 to or or or or 100 Data Source FundVotes GIC / CDP / UN PRI UN PRI Montreal Pledge / PDC CDP 5 applicable to asset managers with US-domiciled funds only; 6 The Global Investor Coalition on Climate Change (GIC) is a joint initiative of four regional groups that represent investors on climate change and the transition to a low carbon economy: AIGCC (Asia), Ceres (North America), IGCC (Australia/NZ) and IIGCC (Europe). 10

12 Annex 2: Company scores Indicators, weights and data sources Category Weight 1 Weight 2 Scoring Metrics Scoring details Emissions Intensity 50% 25% Scope 1&2 emissions intensity (tco 2 Emissions / $1m revenue) Scope 3 emissions intensity (tco 2 Emissions / $1m revenue) Climate Management Performance 50% 25% CDP Climate Change Score (3-year average) Science-Based-Targets Score 3.3 / 10 Trust Metric Score Deforestation Score Fossil Fuel & Key Technologies if applicable n/a 50% Power production capacity (utilities) 0, 50 or 100 Fossil Fuel Reserves 0 Automobile Manufacturers Renewable Electricity 100 Clean energy components & equipment 100 Rail & public transport 100 Environmental Services & Recycling 100 Please refer to notes section below for further details on how metrics are scored. 11

13 Data sources Indicators Data source Emissions Intensity Score tco 2 emissions Scope 1&2, company self-reported tco 2 emissions Scope 1&2, estimated tco 2 emissions Scope 3, company self-reported tco 2 emissions Scope 3, estimated CDP; ISS-climate ISS-climate CDP CDP 7 ; ISS-climate Climate Management Score CDP Climate Change Score (3y average) Science-Based-Target Score Trust Metric Score Deforestation Score CDP CDP / Science Based Targets initiative ISS-climate CDP; Global Canopy Fossil Fuel & Key Technology Score Power production capacity (utilities) Fossil Fuel Reserves Automobile Manufacturers Renewable Electricity Clean energy components & equipment Rail & public transport Environmental Services & Recycling ISS-climate Fossil Free Indexes CDP (CDP Sector Research) Global Industry Classification Standard (GICS) CDP CDP CDP Notes to Annex 2 Emissions Intensity Score Each company is scored for its current emission intensity (GHG emissions / 1$ million revenue). For this, companies are ranked based on their emission intensity relative to all other companies in the Climetrics company universe. A normalized score on a scale from 0 to 100 is then assigned to each company based on its rank. This is done separately for Scope 1 & 2 and Scope 3 emissions. Next, the separate scores for Scope 1 & 2 and Scope 3 are combined into the total Emissions Intensity (EI) score as per the following rules: { If the share of a company's Scope 3 emissions is equal to or greater than 90% of its total emissions, the Scope 3 score makes up 50% of the total Emissions Intensity score; { If the share of a company's Scope 3 emissions is equal to or greater than 75% of its total emissions but less than 90% the Scope 3 score makes up 25% of the total Emissions Intensity score; and 7 For the largest Scope 3 values CDP uses bottom-up models based on production data to calculate the 'Use of Sold Products' emissions for the fossil fuels and automotive sectors. For all other sectors and other Scope 3 categories CDP uses an adaptive multi-variable regression model where applicable.

14 { If the share of a company's Scope 3 emissions is lower than 75% of its total emissions, the Scope 3 score is not considered in the calculation of the total Emissions Intensity Score. Climate Management Performance Score Companies are scored for their management performance relating to climate change and, if applicable, deforestation. The following sub-scores are used in the calculation: CDP Climate Change Score The score is based on the company s 3-year average CDP Climate Change Score 8. The CDP Climate Change Score assesses progress towards environmental stewardship as reported by a company's response to CDP s annual disclosure request. The score assesses the level of detail and comprehensiveness of the content, as well as the company's awareness of climate change issues, its management methods and action taken on climate change as reported in the response. Companies which were not invited by CDP s Climate Change Program to respond to the annual disclosure request and hence, do not have a CDP Climate Change Score, receive the average score of companies in the same industry (based on GICS Industry code). Companies which were invited to participate but failed to disclose any information receive a score of zero. Trust Score Using a proprietary model developed by ISS-climate, the Trust Score assesses the quality of self-reported emissions data (Scope 1&2 emissions) on a scale from 0 to 100 points, with 100 being the best. Science-Based-Targets Score The Science Based Targets initiative is a collaboration between CDP, the UN Global Compact (UNGC), the World Resources Institute (WRI) and WWF. Its goal is to enable leading companies setting ambitious and meaningful corporate GHG reduction targets. Targets adopted by companies to reduce greenhouse gas (GHG) emissions are considered science-based if they are in line with the level of decarbonization required to keep global temperature increase below 2 degrees Celsius compared to pre- industrial temperatures, as described in the Fifth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC AR5). For more information please visit Companies which have officially committed to setting a science-based target within the next 24 months receive 3.3 points. Companies which have an approved science-based-target set receive 10 points. Companies with neither a commitment nor an approved target receive no extra points. Deforestation Score 8 Note: In 2016 CDP changed its scoring methodology, moving away from the calculation of two separate scores (Disclosure Score and Performance Score) to the calculation of one single score, located on a five-band scale (A- E). For 2015, the distinct Disclosure and Performance Scores are scored separately and receive an equal weight). 13

15 For those companies in sectors with a high impact on commodity-driven deforestation and forest degradation, a specific score is included in the calculation of the Climate Management score. The Deforestation Score is calculated by combining, where applicable, the Global Canopy s Forest 500 rating for companies with company-specific data from CDP s Forests Program. All companies requested to disclose information via CDP s Forests Program are automatically selected for the Climetrics deforestation assessment (please refer to Annex 3 for further details). If applicable, the Deforestation Score makes up 25% of the Climate Management Performance score. Climate Management Performance Score summary calculations: Case 1: Deforestation Score not applicable 0.75 x (CDP Climate Change Score x Science-Based-Target Score) x Trust Metric Score Case 2: Deforestation Score applicable 0.25 x Deforestation Score x (CDP Climate Change Score x Science-Based-Target Score) x Trust Metric Score Fossil Fuels & Key Technology Score Indicators relate to the companies direct exposure to fossil fuel extraction and production as well as their application of key low-carbon technologies. Power production capacity (utilities) For companies classified into the Multi-Utilities, Independent Power Producers & Energy Traders and Electric Utilities sub-industries within the Global Industry Classification Standard (GICS), current power production capacity from coal and renewable sources is assessed. Scores are assigned as follows: { Companies with a power production capacity from coal of above 18% of their total capacity receive zero (0) points; { Companies with a power production capacity from renewable sources of above 21% of their total capacity receive 100 points; The power production thresholds as set out above relate to the 2 C target technology shares in The shares are based on the current listed market power production mix and the International Energy Agency (IEA) 2 C (450S) technology trajectory. 14

16 The rating is neutral with respect to generation capacities from other sources. Utility companies not meeting the threshold criteria as set out above are scored for their Emissions Intensity and Climate Management only. Companies meeting both threshold criteria receive 50 points. Fossil Fuel Reserves Coal: Companies from the energy, materials and utilities sectors which are among the 100 largest public companies based on the potential CO 2 emissions embedded in their reported and proven coal reserves receive zero (0) points. Oil & Gas: Companies from the energy, materials and utilities sectors which own more than 1% of the total reserves held by the top 100 oil and gas publicly-traded reserve holders globally receive zero (0) points. Companies whose share of CO 2 emissions embedded in their oil reserves exceeds 33% of CO 2 emissions embedded in their total reserves also receive zero (0) points. Tar sands: The 20 largest publicly-traded holders of unexploited oil sands reserves receive zero (0) points. Automobile Manufacturers Scores are derived from the League Table ranking of CDP s 2018 sector research on automobile original equipment manufacturers (OEM). It ranks 16 of the largest publicly listed automotive companies on business readiness for a low-carbon transition. The companies in aggregate represent 79% of the global passenger vehicle market by sales volume. The key areas assessed in the League Table, which have been aligned with recommendations for company reporting from the G20 Financial Stability Board s Task Force on Climate-related Financial Disclosures (TCFD) are transition risks, transition opportunities and climate governance & strategy. For Climetrics, the underlying League Table ranks are translated into normalised scores on a scale from 0 to 100 for each OEM. For further details about CDP s sector research please visit Renewable Electricity Companies categorized into the Renewable Electricity sub-industry within the Global Industry Classification Standard (GICS) receive 100 points. Clean energy components & equipment Manufacturers of components and equipment required for the production of clean energy (incl. from solar, photovoltaics, wind, geothermal, biomass, waste-to-energy or hydro) receive 100 points. Manufacturers of energy efficient lighting products (LED) also receive 100 points. 15

17 Rail & public transport Railway operating companies (passenger and/or freight) and companies whose primary activity is public transport (public transportation, public transit, or mass transit) receive 100 points. Environmental Services & Recycling Companies with primary activities in the area of waste-to-energy or recycling of metal, aluminum and steel receive 100 points. 16

18 Annex 3: Deforestation score Indicators and weights Companies are selected by CDP s Forests Program based on economic and environmental criteria. In 2017, CDP s Forests Program has used the MSCI ACWI All Cap Index, together with CDP research and the Global Canopy Programme (GCP) s Forest 500 list to identify and prioritize the largest and most impactful companies in relation to deforestation risk. These companies are considered to have a relevant known or anticipated impact on one or more of the major forest risk commodities (cattle products, soy, timber products and palm oil) through production, trading or procurement. In detail, companies selected to be assessed for deforestation are scored on a scale from (lowest - highest) based on data from CDP s Forests Program and GCP s Forest 500 Project, and according to the criteria and weights outlined below: Source: CDP 17

19 Annex 4: Sector tilting multiples GICS Sub-Industry Sector Tilting Multiple Coal & Consumable Fuels Independent Power Producers & Energy Traders Oil & Gas Exploration & Production Oil & Gas Storage & Transportation Construction Materials 5.60 Integrated Oil & Gas 5.25 Marine 4.58 Oil & Gas Drilling 4.37 Electric Utilities 3.65 Diversified Metals & Mining 3.40 Oil & Gas Refining & Marketing 3.13 Steel 2.83 Multi-Utilities 2.72 Industrial Gases 2.53 Aluminum 2.46 Oil & Gas Equipment & Services 2.22 Precious Metals & Minerals 1.95 Silver 1.89 Fertilizers & Agricultural Chemicals 1.86 Diversified Chemicals 1.85 Airlines 1.73 Tires & Rubber 1.59 Marine Ports & Services 1.57 Environmental & Facilities Services 1.49 Construction Machinery & Heavy Trucks 1.38 Gas Utilities 1.34 Paper Products 1.22 Gold 1.21 Automobile Manufacturers 1.20 Motorcycle Manufacturers 1.17 Hotels, Resorts & Cruise Lines 1.16 Commodity Chemicals 1.12 Specialty Chemicals 1.05 Paper Packaging

20 Annex 5: Sector overlay calculations Using the Sector Tilting Multiples described above, the actual percentage weight of each individual portfolio holding is adjusted as per the following formula: WAT i Where: = n i = 1 WBT i WBT i STM i STM i WAT i = % weight of holding i after sector tilting WBT i = % weight of holding i before sector tilting STM i = Sector tilting multiple of holding i n = number of securities in the portfolio The Portfolio Holdings Score is the weighted average of company scores after the sector tilting has been applied. It is calculated as follows: Portfolio Holdings Score = n i = 1 WAT i CS i Where: WAT i = % weight of holding i after sector tilting CS i = Company Score i n = number of securities in the portfolio 19

21 About Climetrics Climetrics is the world s first fund rating which enables investors to integrate climate risk and opportunities into their investment decisions. Covering equity funds in Europe worth 2 trillion, it was developed by two recognized climate specialists: not-for-profit CDP (formerly Carbon Disclosure Project) and ISS-climate, part of the responsible investment arm of Institutional Shareholder Services Inc. Climetrics provides investors with a 1-5 rating symbolized by green leaves issued on a scale of one to five based on a comprehensive, three-level methodology using data from CDP and ISS-climate. Top-rated funds can be found for free on climetricsrating.org. Climetrics was catalyzed and funded by Climate-KIC, the EU s main climate innovation initiative. About CDP CDP is an international non-profit that drives companies and governments to reduce their greenhouse gas emissions, safeguard water resources and protect forests. Voted number one climate research provider by investors and working with institutional investors with assets of US$100 trillion, we leverage investor and buyer power to motivate companies to disclose and manage their environmental impacts. Over 6,000 companies with some 60% of global market capitalization disclosed environmental data through CDP in This is in addition to the over 500 cities and 100 states and regions who disclosed, making CDP s platform one of the richest sources of information globally on how companies and governments are driving environmental change. CDP, formerly Carbon Disclosure Project, is a founding member of the We Mean Business Coalition. Please visit cdp.net or follow to find out more. About ISS Founded in 1985 as Institutional Shareholder Services Inc., ISS is the world s leading provider of corporate governance and responsible investment (RI) solutions for asset owners, asset managers, hedge funds, and asset service providers. ISS solutions include: objective governance research and recommendations; RI data, analytics, and research; end-to-end proxy voting and distribution solutions; turnkey securities class-action claims management (provided by Securities Class Action Services, LLC); and reliable global governance data and modelling tools. Clients rely on ISS' expertise to help them make informed corporate governance and responsible investment decisions. For more information, please visit 20

22 This document and all of the information contained in it, including without limitation all text, data, graphs, charts (collectively, the Information ) are the property of Climetrics, CDP and/or ISS, as the case may be. The Information may not be reproduced or disseminated in whole or in part without prior written permission of Climetrics. The user of the Information assumes the entire risk of any use it may make or permit to be made of the Information. THE PARTIES MAKE NO EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE INFORMATION AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY, TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION. 21