Aggregate emissions are still rising for key equity market benchmarks, but indexes are becoming less carbon-intensive, according to research by the London Stock Exchange Group (LSEG).
In absolute terms, emissions in global equity benchmarks have yet to peak, with emissions for the FTSE All World index expanding at a 4% CAGR in 2016-2023 to 13 billion tonnes CO2 equivalent.
Over the same period, portfolio carbon intensity gradually declined, with the FY2023 Weighted Average Carbon Intensity 26% lower in equities and 20% in fixed income.
Absolute emissions have declined slowly in fixed income – at –1% per annum for the FTSE WorldBIG Corp index – partly because benchmarks for the sector haven’t seen a comparable shift toward greater emerging markets.
The Decarbonisation in Portfolio Benchmarks 2025 report is the fourth in a series developed in partnership with the Net Zero Asset Owners Alliance (NZAOA), a member-led initiative of 88 institutional investors representing US$9.5 trillion AUM committed to transitioning their portfolios to net zero GHG emissions by 2050.
The report included attribution analysis showing that year-on-year fluctuations in portfolio intensities are still mostly influenced by non-carbon factors, such as normalisation and allocation effects. However, changes in emissions intensity does appear to be driven by real-world corporate emission reductions in sectors such as utilities.
It also noted that, with green bonds now representing ~5% of investment-grade bond universe, their treatment is increasingly important in portfolio emissions calculations.
“Different treatments of green bonds in portfolio emissions calculations, including discounting and use-of-proceeds modelling, can lead to materially different results that are large enough to shift portfolio intensity,” the report said.
A total of 65% of FTSE All-World constituents are now setting long-term climate targets, an eightfold increase since 2018, though the pace of new commitments has slowed since 2021.
FY2024 disclosures show that all the world’s top ten asset managers and half of the top ten pension funds now report on their portfolio emissions.
“Portfolio emissions calculations can seem straightforward, but unpacking what these numbers mean in practice can be challenging. It requires a nuanced understanding not only of emissions trends, but also how they interact with financial factors and portfolio composition in key investment benchmarks,” said Jaakko Kooroshy, Global Head of Sustainable Investment Research, LSEG.
