Willis Towers Watson (WTW) and Qontigo have announced the launch of the STOXX WTW Climate Transition Indices (CTI), which utilise a new methodology to quantify the impact of a Paris-aligned climate transition on equity valuations.

The CTI are expected to help investors, governments and companies to manage the risk and opportunities in their portfolios, looking "beyond carbon emissions” with a forward-looking, bottom-up evaluation of transition risk and opportunity for each company.

The proprietary Climate Transition Value at Risk (CTVaR) measure analyses the impact of moving from a business as usual approach to a world where emissions pathways are fully aligned to the goals of the Paris Agreement on projected company cashflows.

WTW has also partnered with EOS at Federated Hermes to deliver voting and engagement services for the fund, while the Asset Management Exchange (AMX), an affiliate of WTW, has launched a UCITS fund which will track the STOXX index.

The fund will be available to defined benefit (DB) and defined contribution (DC) pension schemes in multiple countries, with around $1bn expected to be invested by the end of 2021.

Commenting on the launch, WTW global chief investment officer, Craig Baker, emphasised that investors need a "robust framework" that can quantify and incorporate the financial impact of climate risk, clarifying that "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," he continued.

“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.”

WTW climate transition analytics senior director, David Nelson, added: “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.

“Whilst 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.”

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