The world is on a “fast track to climate disaster”, UN Secretary-General António Guterres warned in April. With the current trajectory, global warming is expected to exceed the 1.5°C limit set under the Paris Agreement and result in severe impacts on the environment and livelihoods.

To avoid this future, global greenhouse gas (GHG) emissions will have to peak before 2025 at the latest, according to estimates by the Intergovernmental Panel on Climate Change.

This pressure to do so has led investors, financial institutions and other stakeholders to scrutinise the carbon profile of businesses, beyond their environmental, social and governance (ESG) targets. Businesses have to take action and reduce their carbon emissions or risk losing key customers and markets.

This movement gained further momentum last year at COP26, where countries including Malaysia made commitments to achieve net zero GHG emissions in the next few decades. Another catalyst is the Net Zero Asset Managers initiative, where an international group of asset managers have committed to support the goal of net zero emissions by 2050 or sooner. As at May, it represented US$61.3 trillion in assets under management globally.

All these translate to a need for businesses to pay close attention to their carbon emissions and for investors to analyse the carbon footprint of their portfolio companies.

Heeding the call to better address this heightened interest and focus on the climate agenda, Bursa Malaysia, together with its index partner FTSE Russell, launched the FTSE Bursa Malaysia Top 100 ESG Low Carbon Select Index (FBM100LC) and the FTSE Bursa Malaysia Top 100 ESG Low Carbon Select Shariah Index (FBM100LS) on Aug 29.

The indices track companies in the FBM Top 100 Index that have recognised sustainability practices and low-carbon characteristics. It excludes companies operating in controversial sectors such as weapons, thermal coal, tobacco, nuclear power generation, gambling, adult entertainment and those involved in controversies as defined by the principles of the UN Global Compact.

Domestic and international investors who want to manage their exposure to ESG and climate risks should use these indices as they include targeted reductions in carbon reserves and emissions as well as targets an uplift in ESG performance. Investors who want to create funds and exchange-traded products can use these indices as a benchmark.

The FTSE4Good Bursa Malaysia Index uses FTSE Russell’s market leading and best-in-class ESG selection methodology to select constituents based on ESG scores within a certain threshold. On the other hand, the ESG Low Carbon Select indices are based on the FTSE Bursa Malaysia Top 100 Index. Companies are not screened out of the indices but rather, a transparent tilting methodology is applied to either overweight or underweight the stocks on the index.

The tilt in the indices are designed to achieve predetermined targets relative to the parent benchmarks, which are the FTSE Bursa Malaysia Top 100 Index and FTSE Bursa Malaysia Top 100 Shariah Index. The targets are a 20% improvement in ESG performance, as determined by the FTSE Russell ESG score; a 30% reduction in operational carbon emissions intensity; and a 30% reduction in fossil fuel (coal, oil and gas) reserves intensity.

Based on the five-year performance data, the FBM100LC and FBM100LS outperformed their benchmarks by 5% and 6% respectively. This translates to an annualised return of 1.98% and 0.2% for the FBM100LC and FBM100LS respectively.

This means that using the Low Carbon indices as an investment tool not only allows investors to effectively manage the carbon intensity and ESG performance of their portfolios, but also potentially gives them better returns. With the constituents drawn from companies with larger market capitalisations, institutional investors will find it easy to adopt these indices for their passive strategies.

The index fact sheets and ground rules are available on FTSE Russell’s FBM Index series webpage (www.ftserussell.com/products/indices/bursa-malaysia), from which details of the top 10 index constituents can be obtained. The Bursa Data Business-Index & Sustainable Business team can be reached at ISB@bursamalaysia.com.