Willis Towers Watson and Qontigo last year introduced the STOXX Willis Towers Watson Climate Transition Indices (CTI) to meet growing demand for transparent and systematic climate-oriented investment solutions. The indices employ a in house Climate Transition Value at Risk (CTVaR) methodology that quantifies the anticipated impact on equity valuations from the transition to net-zero.

climate transition risks 

The Climate Transition Indice CTI intends to achieve a more sophisticated way of managing climate transition risk, one that looks beyond carbon emissions and makes a forward-looking, bottom-up evaluation of asset repricing risks in a decarbonization pathway. The CTVaR measure analyses the effect on projected company cashflows of moving from a ‘business-as-usual’ scenario to a world consistent with the goals of the Paris Agreement, using today’s prices. 

By using these CTVaR projections, the indices tilt towards companies that are expected to fare well and away from those that are predicted to experience meaningful losses in value as the economy transitions.  

The latest whitepaper from Diana R. Baechle, PhD, Principal, Applied Research at Qontigo, explores the characteristics of the first of those indices, the World CTI, and evaluates its risk profile relative to a traditional global equity allocation as represented by the iSTOXX® World A Index (World Index). To provide a detailed risk analysis of transitioning a traditional portfolio to one that manages climate risks using the CTVaR methodology, the study reviews the changes incurred by shifting from the starting portfolio to the World CTI in successive 25% allocation increments.

Those incremental allocations to the World CTI take the weighted average CTVaR of the final portfolio to zero, down from –3% for the World Index. In other words, 3% of the starting global index is at risk from the transition to a net-zero economy.

Figure 1: Climate transition value at risk

Source: Baechle, D. R., ‘Holding the world in your portfolio and considering climate transition risks,’ Qontigo, May 2022. Data from WTW and Qontigo as of September 1, 2021. ‘CTI’ refers to World CTI index.

While not an explicit component of the methodology, the World CTI also looks better on other sustainability metrics. The study shows that the weighted average ESG risk score was slightly lower for the World CTI and the progressive portfolios than for the World Index. The World CTI also showed a substantially better profile in terms of carbon emissions.

Table 1: Sustainability metrics

Source: Baechle, D. R., ‘Holding the world in your portfolio and considering climate transition risks,’ Qontigo, May 2022. Data from WTW, Sustainalytics, ISS ESG. ESG risk score as of September 1, 2021. Emission intensity as of October 1, 2021. ‘CTI’ refers to World CTI index.

Source: Diana R. Baechle, PhD, Principal, Applied Research at Qontigo – Holding the world in your portfolio and considering climate transition risks

This article is not intended to be a forecast, analysis or investment advice, and is not a recommendation, or an offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are subject to change. References to specific securities, asset classes and/or financial markets are for informative purposes only and are not intended to be and should not be interpreted as recommendations. Reliance upon information in this material is at the sole risk and discretion of the reader. The material was prepared regardless to any specific objectives, financial situation or needs of any investor. Past performance is not a reliable indicator of current or future results.