Sustainability-related Disclosures

Franklin S&P 500 Paris Aligned Climate UCITS ETF is designed to track the performance and investment objective of the underlying index which has been weighted to be collectively compatible with a 1.5ºC global warming climate scenario. The Index is constructed to follow the EU Paris-aligned Benchmark (EU PAB) Regulations and aims to meet a year-on-year 7% decarbonization target while reducing greenhouse gas intensity by at least 50% when compared to its underlying benchmark. It is reliant on the methodology of the Index to ensure none of its holdings breach the ‘Do No significant Harm’ principle.

Franklin S&P 500 Paris Aligned Climate UCITS ETF tracks the S&P 500 Paris-Aligned Climate Index (the ‘Index’) which is designed to measure the performance of eligible S&P 500 Index securities, selected and weighted to be compatible with a 1.5ºC global warming scenario. It provides exposure to US large capitalisation stocks selected from the S&P 500 Index (the “Parent Index”) and aims to help investors move towards a low-carbon economy, aligning investments to the Paris Climate Agreement.

The S&P 500 Paris-Aligned Climate Index is a systematic, rules-based index that is owned and calculated by S&P. It aims to meet the recommendations from the European Commission’s Technical Expert Group (TEG), as published in the Final Report on Climate Benchmarks and Benchmarks’ ESG Disclosures. The report proposes the definitions of minimum standards for the methodology of any ‘EU Climate Transition’ and ‘EU Paris-Aligned’ benchmark indices that would be aligned with the objectives of the Paris Agreement, and addresses the risk of greenwashing.

The Index also incorporates factors that seek to manage transition risk and climate change opportunities in a way that aligns them with the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures’ (TCFD) 2017 Final Report, covering transition risk, climate change opportunities, and, for the S&P Paris-Aligned Climate Index Series, stranded asset and physical risk.

Relative to the Parent Index, the Index (i) overweights those companies which are committed to reducing greenhouse gas emissions, assessed using Green House Gas Intensity as measured by scope 1, 2 and 3 emissions described in the PAB Regulations and (ii) will have a 50% decarbonization. In addition, the total Green House Gas Intensity of the Index must reduce by 7% annually. Index Securities’ selection and weighting are based on assessments by the Index Provider on how aligned individual companies within the Parent Index are to the 1.5ºC global warming scenario, e.g. a company’s emissions, green revenue, environmental scores, science-based climate targets, and measures and strategies in place to reduce emissions; with companies which are not aligned or are poorly aligned with this scenario given lower weightings relative to those which are better aligned.

The Index’s weightings of industrial sectors which have a high impact on climate change (e.g. NACE2 industry categories such as electricity, gas, steam and air conditioning supply, transport & storage and manufacturing) will at least be equal to the weightings of such sectors in the Parent Index. However, securities that generate revenues from coal, oil and gas exploration or processing activities above the thresholds set out in the PAB Regulations are excluded, as well as those securities that derive higher than 10% of their revenues from thermal coal based power generation, or higher than 50% from power generation with carbon intensity of lifecycle emissions higher than 100gCO2e/kwh. In addition, companies which are included in the Parent Index, but which do not comply with the principles of the UN Global Compact, a United Nations pact to encourage businesses worldwide to adopt sustainable and socially responsible policies, or are involved with tobacco or controversial weapons, such as landmines and cluster munitions, are excluded from the Index.

The Index incorporates a variety of specified decarbonization targets and aligns with certain specified criteria through the use of optimization with multiple model constraints including:

  • Alignment to a 1.5ºC climate scenario using Trucost’s Transition Pathway Model
  • Reduced overall greenhouse gas (GHG expressed in CO2 equivalents) emissions intensity compared to their respective underlying parent index by at least 30% and 50% for the S&P Climate Transition Index Series and S&P Paris-Aligned Climate Index Series respectively
  • Minimum self-decarbonization rate of GHG emissions intensity in accordance with the trajectory implied by Intergovernmental Panel on Climate Change’s (IPCC) most ambitious 1.5ºC scenario, equating to at least 7% GHG intensity reduction on average per annum.
  • Increased exposure to companies with Science Based Targets from the Science Based Target Initiative (SBTI) that are credible and consistent with the above decarbonization trajectory
  • Improved S&P DJI Environmental Score (further defined further below) compared to the parent index
  • Exposure to sectors with high impact on climate change at least equivalent to the parent index
  • Managed exposure to potential climate change opportunities through controlled green-to-brown revenue share in order to align with the recommendations of the TCFD
  • Capped exposure to non-disclosing carbon companies
  • Constituent-level weight capping to address liquidity and diversification.

As the Fund tracks the S&P Paris-Aligned Climate Index Series, further constraints comprise:

  • Reduced exposure to physical risks from climate change using Trucost’s Physical Risk dataset
  • Improved exposure to potential climate change opportunities through substantially higher green-to-brown revenue share compared to the parent index
  • Reduced exposure to fossil fuel reserves compared to the parent index

As well as the exclusion of companies from the underlying parent index with:

  • Involvement in controversial weapons and tobacco business activities
  • Disqualifying United Nations Global Compact (UNGC) scores
  • Involvement in relevant ESG controversies

Franklin S&P 500 Paris Aligned Climate UCITS ETF is aligned with and tracks the performance of the S&P 500 Paris-Aligned Climate Index. The Index is constructed to follow the EU Paris-aligned Benchmark (EU PAB) Regulations (Regulation (EU) 2019/2089) (the “PAB” Regulations).

Attainment of the sustainable investment objective - while minimizing the difference in constituent weights to the underlying parent index (S&P 500 Index) - is achieved through a variety of specified decarbonization targets and alignment with specified criteria through the use of optimization with multiple model constraints. These include alignment to a 1.5ºC climate scenario, reduced overall greenhouse gas emissions intensity of at least 50% compared to the parent index and a greenhouse gas intensity reduction of at least 7% on average per annum.

The sustainable investment objective of the S&P 500 Paris-Aligned Climate Index, compared to that of the parent index, is further demonstrated through increased exposure to companies with Science Based Targets from the Science Based Target Initiative (SBTI), improved S&P DJI Environmental Scores compared to the parent index and exposure to sectors with high impact on climate change at least equivalent to the parent index.

The EU Low Carbon Benchmark Regulation Disclosure Report published by the Index Provider, S&P, provides comprehensive ESG metrics at an index level.