Climate Portfolio Analysis: A Multifaceted Approach to Risk

Viola Lutz is Vice President, Head of Investor Consulting and Guido Lorenzi is an associate at ISS ESG. This post is based on their ISS ESG memorandum.


Climate portfolio analytics allows investors to assess and monitor risk exposure related to several climate-related issues, including emissions exposure, and physical and transitional risk. This article demonstrates the benefits of portfolio analysis related to climate change risk by providing a comparison of greenhouse gas emissions and climate risk exposure between the S&P 500 and the STOXX 600 indexes at the end of 2018. The absolute emission exposure of the S&P 500 is approximately 45 percent lower than the emission exposure of the STOXX 600, but STOXX 600 companies manage climate risks better than S&P 500 companies. A review of absolute emissions can help investors identify the largest greenhouse gas emitters in a portfolio today, but a more comprehensive forward-looking analysis is required to identify the climate leaders and laggards of tomorrow. Emissions estimations coming from the activity of the company and climate risk management are among the recommended disclosures included in the Guidelines on Reporting Climate-Related Information published by the European Commission on June 18th 2019.

Emissions Exposure

An equal investment in the STOXX 600 and the S&P 500 faces different exposure with respect to carbon emissions. The S&P 500 investment has an absolute emissions exposure that is lower than the STOXX 600 emissions exposure by more than 45 percent. For an investment of $1 million in each index, the exposure of the S&P 500 index is estimated at 397 tCO2e compared to 767 tCO2e for the STOXX 600, based on Scope 1 (direct), Scope 2 (indirect) and Scope 3 (upstream and downstream corporate value chain) emissions. The definitions of the three Scopes are those proposed by the GHG Protocol: Scope 1 accounts for emissions from combustion in owned facilities, Scope 2 for emissions from the generation of purchased electricity or heat, while Scope 3 includes emissions linked to the products or activities of a company, not directly controlled by the company. An example of Scope 3 emissions for an oil and gas company is represented by the emissions from the combustion of oil products after they have been sold. The difference in exposure between the two indexes is mainly attributable to the differing sectoral distribution. The market capitalization of the S&P 500 comprises only 7 percent companies belonging to the emission-heavy utilities and energy sectors, while approximately 12 percent of the market capitalization of the STOXX 600 is exposed to these sectors.

Emissions exposure is typically estimated based on direct and indirect emissions. For both indexes, almost half of Scope 1 and 2 emissions stem from the 10 highest emitters in absolute terms. Therefore, investors could reduce emission exposure via a targeted reduction of investment across a relatively small number of companies.

Climate Reporting Quality and Risk Management

This quantitative perspective can be complemented with qualitative indicators such as ISS ESG’ Climate Reporting Quality metric and the ISS Carbon Risk Rating. The Climate Reporting Quality metric offers an assessment of the quality of emissions disclosure. The Carbon Risk Rating (CRR) measures how well a company manages the risk associated with low carbon policies and is partially influenced by the risk management policies of the company itself and partially by the risk connected to the business sector. CRR also identifies companies as “laggards,” “underperformers,” “performers,” or “overperformers” with respect to managing future emissions, setting targets, and changing their product portfolios.

While the 10 highest emitters in the STOXX 600 provide emissions disclosure, only eight of the top 10 S&P 500 emitters provide sufficient emissions disclosure. Namely, Philipps 66 Company does not provide any disclosure, while The Southern Company’s disclosure is deemed inconsistent. According to the Carbon Risk Rating, these same two companies demonstrate insufficient management of climate-related risks. Philipps 66 is classified as a “laggard,” while the Southern Company is deemed an “underperformer” based on the rating methodology. Three of the top 10 emitters in the STOXX 600 index are classified as “laggards.” However, the weighted average of the Carbon Risk Ratings across all STOXX 600 constituents is higher compared to the S&P 500. With a best score of 100, the STOXX 600 receives a score of 40, compared to a score of 27 for the S&P 500, indicating better average climate change risk management by European firms.

S&P 500 Top 10 Carbon Emitters

Issuer Name Contribution to Portfolio
Emission Exposure (%)
Portfolio Weight (%) Emissions Reporting
Carbon Risk Rating
DTE Energy Co. 7.86% 0.48% Moderate Underperformer
United Continental Holdings, Inc. 6.78% 0.48% Strong Underperformer
NiSource, Inc. 6.68% 0.53% Strong Underperformer
Waste Management, Inc. 4.59% 1.12% Strong Underperformer
American Electric Power Company, Inc. 4.02% 0.16% Moderate Underperformer
The Southern Co. 3.44% 0.16% Inconsistent Underperformer
Entergy Corp. 3.38% 0.17% Strong Underperformer
Phillips 66 3.25% 0.55% Non-Reporting Laggard
The AES Corp. 3.00% 0.05% Strong Underperformer
Chevron Corp. 2.99% 0.93% Strong Laggard
Total for Top 10 46.07% 4.63%

Source: ISS ESG

STOXX 600 Top 10 Carbon Emitters

Issuer Name Contribution to Portfolio

Emission Exposure (%)

Portfolio Weight (%) Emissions Reporting


Carbon Risk Rating
ArcelorMittal SA 8.12% 0.18% Moderate Underperformer
LafargeHolcim Ltd. 7.79% 0.25% Strong Underperformer
RWE AG 7.31% 0.14% Strong Underperformer
ENEL SpA 5.06% 0.56% Strong Performer
ENGIE 4.20% 0.31% Moderate Underperformer
HeidelbergCement AG 4.12% 0.12% Strong Underperformer
Royal Dutch Shell Plc 3.86% 2.20% Strong Laggard
Uniper SE 3.20% 0.10% Moderate Underperformer
BP plc 2.83% 1.27% Strong Laggard
Evraz plc 2.37% 0.10% Strong Laggard
Total for Top 10 48.87% 5.23%

Source: ISS ESG

Energy Sources and Exposure to Fossil Reserves

The transition towards renewable energy sources is a key contributing factor towards reducing future emissions. Utilities companies generating power in the S&P 500 have 66 percent of their installed capacity based on fossil fuel combustion and 6 percent based on renewable sources. For companies in the STOXX 600 these numbers are 50 percent and 20 percent, respectively. The graph below compares the energy generation mix of the two indexes with an energy mix compatible with the 2°C scenario (2DS) proposed by the International Energy Agency (IEA) for the years 2030 and 2050. While the S&P 500 index has a lower emission exposure overall, its exposure to utilities generating energy from fossil fuels is more than 10 percentage points higher than for the STOXX 600. In addition, the S&P 500 index’s exposure to renewable energy is a small fraction of the share necessary to comply with the 2°C scenario.

The analysis of the exposure to fossil reserves presents a somewhat different picture. Slightly less than five percent of a hypothetical investment in the S&P 500 is linked to fossil reserves, while the same metric for the STOXX 600 stands at 9 percent. This figure translates into the STOXX 600 being exposed to 4,379 tCO2e of potential emissions related to a hypothetical investment of $1 million, while the same investment in the S&P 500 is exposed to 591 tCO2e of potential emissions. The difference is attributable to the more extensive presence of coal reserves for the STOXX 600 (65 percent of the total reserves, compared to only 2 percent for the S&P 500).

A Holistic Approach for a Detailed Climate Assessment

The above analysis shows that a holistic perspective is necessary to gain a deep understanding of the climate impact and risk within a portfolio. A multifaceted approach to climate risk analysis offers valuable insights into a complex and multilayered problem. While a certain portfolio might perform well regarding emissions intensity, such as the S&P 500 having a better performance than the STOXX 600, a deeper dive can reveal a more differentiated picture. The carbon risk rating shows, for example, that companies in the STOXX 600 are better prepared for a future influenced by policies that favor low carbon technologies. In terms of fossil reserves, an investment in the S&P 500 includes a lower share of companies linked to fossil reserves and, consequently, the investment is associated with lower potential future emissions than an equal investment in the STOXX 600. However, the lower exposure of the S&P 600 to “brown” installed capacity (non-renewable energy sources) outbalances the higher future emissions connected to fossil reserves, resulting in a better climate risk performance.

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