Scientific Portfolio, an EDHEC venture, has launched Scientific Climate Indices (SciX), a climate-focused index provider aimed at helping institutional investors incorporate climate-related considerations into equity portfolios.
The business has been established to develop equity indices that reflect climate risks, transition objectives and adaptation considerations, while seeking to maintain characteristics similar to traditional market benchmarks.
SciX combines climate-risk data, climate science and quantitative portfolio construction techniques to create indices designed for institutional investors. The firm said the offering draws on expertise from the wider EDHEC climate ecosystem and can be adapted to meet investors’ specific requirements.
Two initial index ranges
The launch includes two index series focused on physical climate resilience and climate mitigation.
The SciX Physical Climate Resilience Index Series is intended to help investors account for the potential impact of physical climate risks within equity portfolios.
According to the firm, many existing approaches to physical climate-risk analysis rely on detailed company-level assessments that can be difficult to apply across large investment universes.
SciX said its approach uses a top-down framework developed specifically for index construction, with the option to incorporate additional company-level data where required.
The firm’s core resilience index targets a 15% reduction in long-term physical climate risk relative to the benchmark, with a tracking error of around one percentage point.
The SciX Climate Mitigation Index Series has been developed to support investors seeking to address climate transition risks and decarbonisation objectives through index-based strategies.
SciX said the methodology takes account of some of the challenges associated with emissions data and carbon reduction pathways, including differences in carbon intensity across sectors and concerns around broad exclusion-based approaches.
The methodology also incorporates external assessments of companies’ emissions progress alongside reported company data.
Benchmark-aware approach
Both index families are based on core indices designed to stay relatively close to conventional capitalisation-weighted benchmarks while reflecting specified climate objectives.
The indices can be used as alternatives to traditional benchmarks or as starting points for further customisation. Investors can also modify objectives, exclusions and portfolio constraints, with backtesting and simulation tools available to assess the potential impact of different design choices on factors such as tracking error, sector exposures and risk concentrations.
Benjamin Herzog, CEO, Scientific Climate Indices, said: “Climate risk is becoming financially material, and that has profound implications for long-term investors.
“Capitalisation-weighted indices will remain essential reference points, but they will never be quite the same again: once we recognize that climate can affect the long-term value and risk of companies, simply holding the market is itself an investment choice.
“The challenge is to integrate those climate fundamentals while preserving the diversification, risk control and benchmark discipline institutional investors need. That is what we have built SciX to do.”
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