Insurance broker and advisory firm Willis Towers Watson (WTW), in collaboration with index provider Qontigo, has launched a suite of climate transition indices aimed at helping investors incorporate climate transition risk into their investment strategy and work towards their net zero goals.

The STOXX Willis Towers Watson Climate Transition Indices (CTI) offers a “forward-looking, bottom-up” way to evaluate transition risk and opportunity for each company.  The CTI can be incorporated into portfolios as a replacement for market-cap-weighted indices, as part of a diversified smart beta portfolios, or as a complement to active equity approaches, WTW says.

A proprietary Climate Transition Value at Risk (CTVaR) measure analyzes the impact on projected company cashflows of moving from a “business as usual” scenario – reflecting current policies – to a world where emissions pathways are fully aligned to the goals of the Paris Agreement.

In addition to the launch of the index series, Asset Management Exchange (AMX), an affiliate of Willis Towers Watson, is launching a UCITS fund, which will track the STOXX Willis Towers Watson World Climate Transition Index. Willis Towers Watson has partnered with EOS at Federated Hermes, a stewardship provider, to deliver voting and engagement services for the fund. Climate change is a key focus area for EOS’ engagement.

The fund, which will be available to defined benefit and defined contribution pension plans in multiple countries, is anticipated to receive in the region of US$1 billion by the end of 2021.

Craig Baker, WTW global chief investment officer, says: “Investors need a robust framework that can quantify and incorporate the financial impact of climate risk, but this is something that just hasn’t been widely available until now. We believe that understanding this transition, through our CTVaR, should be one of the biggest sources of alpha across all asset classes over the next few years.

“This new fund will be a valuable tool for pension plans to both reduce their climate risk and take advantage of the opportunities thrown up by a transition to a Paris-aligned world. Climate change is a systemic and urgent global challenge and also one that will significantly disrupt capital allocations and returns.”

David Nelson, WTW climate transition analytics senior director, adds: “By curating data from multiple sources, the CTI takes a unique approach by refreshing forward-looking company transition risk over time rather than simply using historic carbon emissions data. While current climate metrics can help to identify outliers, many of the current approaches to factoring climate risk into investments tend to be simplistic and fall short of accurately identifying their impact on company valuations.”