Natural resources companies are prominent constituents of the FTSE UK Index, resulting in a relatively high carbon emissions and carbon reserves intensity score for the index. At the same time, the UK index has a fairly high ESG rating overall, with very few stocks averaging a higher ESG rating and low carbon emissions intensity at the same time. This creates a challenge for investors looking to construct benchmarks that have a high ESG rating, and a low carbon reserves and carbon emissions intensity. In this paper, we investigate how to resolve this conundrum for the FTSE UK Index and find:
- Stocks with higher ESG scores and lower carbon emission intensities are only limited and concentrated in relatively few industries
- To achieve carbon emission and reserve intensity reduction and improvement in ESG score, an SI index would need its industrial weights to deviate from those of the underlying market capitalisation benchmark
- The application of a simple construction methodology simultaneously tilts away from carbon intensive stocks towards stocks with higher ESG ratings—the maximum deviations are constrained to limit the tracking error with the FTSE UK Index benchmark
