The comparison we make is market neutral avoiding some of the quantitative pitfalls commonplace in comparing ‘green’ portfolios with other portfolios. The portfolios that we compare have identical sets of issuers but we make an adjustment for portfolio weights to less carbon-intensive issuers, using both between and within sector scorings, as per the ECOBAR methodology.
The implementation of the strategy is straight-forward for investors using (index) benchmarks. The S&P500 Bond Investment Grade Carbon Efficient Index, based on the ECOBAR methodology, went live in November 2018. The carbon efficient index operates both through re-weighting between sectors as well as within sectors.
The ECOBAR system is generally less restrictive and more flexible than exclusion-based ESG strategies, for example allowing traders to increase positive impact (scoring) through shorting underperformers and adjusting for term-structure effects in credit. The S&P carbon-efficient indices are based on TruCost’s carbon measurement methodology, as S&P acquired TruCost in 2016.