COtoolFrequently Asked Questions

April 2021

For professional clients only.This document is for the exclusive use of investors acting on their own account and categorised either as “Eligible Counterparties” or “Professional Clients” within the meaning of Markets in Financial Instruments Directive 2014/65/EU.

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METHODOLOGY ► Why has Lyxor launched the COtool?

► How does the temperature measure work?

► Why should I trust the methodology?

► Where does the data come from?

► What time period is used for past and future emissions?

► What types of fund can be scored?

► Why does the methodology combine two approaches (SDA/GEVA)?

► Which sectors are covered by the SDA approach?

► Which sectors are covered by the GEVA approach?

► How often are temperatures updated?

► What are the possible temperature ranges?

► What is a ‘scope’ of emission?

► Which scopes of emissions are included in the methodology?

► What is a ‘climate scenario’?

RESULTS INTERPRETATION ► How should I interpret the results I see?

► How can a high-carbon sector be 1.5°C or 2°C compatible?

► How can a low-carbon sector have a high temperature?

► How can an ESG ETF have a high temperature?

► How can an ETF have a higher carbon intensity and low temperature?

► Why is a temperature result different from another I’ve seen?

► Why can temperature results vary from a month or year to another?

► Why does Lyxor display a precise temperature for some funds and only a range of temperature for other funds?

► Does the weighted average (in AuM) of temperatures of issuers in a fund equal the portfolio temperature?

► Does the weighted average (in AuM) of temperatures of SDA part and GEVA part of the portfolio equal the portfolio temperature?

► What is a carbon budget?

► What information related to climate alignment is available in Lyxor’s public factsheets?

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METHODOLOGYWhy has Lyxor launched the COtool?It’s simple: we believe it’s high time investors had a better way to judge where to put their money. The global investment community is responsible for vast amounts of wealth, but it doesn’t always have the tools needed to deploy this wealth in the most impactful way.

By publishing temperatures for the indices tracked by our funds, we are making it much simpler for investors to compare the warming impact of their investments to the targets of the 2015 Paris Agreement. The Agreement wants to limit global warming to a maximum of +2°C, and ideally +1.5°C. With the Lyxor COtool, you can see how more than 150 Lyxor ETFs align with this goal.

How does the temperature measure work? We calculate temperatures for our funds using data from Trucost, part of S&P Global. Trucost measures the climate impact of companies in the indices tracked by our ETFs. We use the company-level emissions information to calculate a combined score for the group of companies in an index.

Companies are scored using one of two approaches, depending on their sector. For companies in carbon-intensive sectors such as power production, temperature impact is assessed with the Sectoral Decarbonisation Approach (SDA). SDA assesses carbon intensity per physical unit, such as a kilowatt hour of energy.

For other sectors, the Greenhouse Gas Emissions per unit of Value Added (GEVA) approach is used. GEVA assesses carbon intensity and temperature impact using emissions generated per US dollar of profit. Read more about Lyxor’s temperature methodology here.

Why should I trust the methodology?Having analysed all the various options to measure a portfolio’s alignment with the Paris Agreement, we believe our methodology gives the most accurate results on temperature impact.

Our approach benefits from a combination of the SDA and GEVA approaches recommended by the SBTI. By combining both approaches, we can expand the tool’s scope and provide more comprehensive results.

We also use a third-party data provider, Trucost, to guarantee an independent view on the temperature impact of our funds. Trucost is a subsidiary of S&P Global and specialises in analysing ESG and climate-related risks. Read more about Lyxor’s temperature methodology here.

Where does the data come from?Our data on companies’ carbon emissions (historical, current, and forecast) is provided by Trucost, a subsidiary of S&P Global which specialises in analysing ESG and climate-related risks. Forecast data are either public commitments reported by companies themselves, or extrapolated by Trucost based on historical data.

What time period is used for past and future emissions?The temperature measure is based on past and future emissions data. Past emissions data are dated from 2012 or 2014 for some issuers, and future emissions data are forecasts of companies’ emissions on a five-year horizon. Several years of historical data and of forecasts provide a comprehensive overview of issuers’ efforts to reduce their emissions.

What types of fund can be scored? As of today, our scores can be applied to equity and corporate bond funds. We are working to extend the approach to sovereign portfolios.

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Why does the methodology combine two approaches (SDA/GEVA)?The SDA approach, which is better overall, can currently only be applied to a limited number of sectors. To measure the alignment of other sectors, and to measure alignment at the fund level, Lyxor’s temperature methodology uses the GEVA approach, which can be applied to all types of sectors.

Which sectors are covered by the SDA approach?The SDA approach (Sectoral Decarbonisation Approach) covers homogeneous sectors with high contributions to carbon emissions. These include power generation, steel, aluminium, cement, and aviation. We’re aiming to expand the SDA approach to other sectors. The oil & gas and automotive sectors should be assessed using SDA approach in the coming months, for their scope 3 emissions.

Which sectors are covered by the GEVA approach?The GEVA approach (Greenhouse gas Emissions per unit of Value Added) can be applied to mixed sectors and/or those with low contributions to carbon emissions. GEVA is applied to sectors not eligible to the application of SDA approach, and to companies active in multiple business activities.

How often are temperatures updated?ETF temperatures are updated monthly to capture changes in fund composition. Underlying data used for the calculation of a fund temperature are updated at different frequencies, but data related to the fund’s composition (issuers, amounts invested) are updated on a monthly basis.

What are the possible temperature ranges?The possible ranges of temperatures for a fund are the following:

► < 1.5°C,

► 1.5°C – 2°C,

► 2°C – 3°C,

The number of possible temperature ranges is limited because of lack of scenarios below 1.5°C or above 3°C for issuers assessed using the SDA approach. However, they provide enough information to evaluate a fund’s alignment against the climate goals of the Paris Agreement.

What is a ‘scope’ of emission? Greenhouse gas emissions can be broken down into three different ‘scopes’, according to the Greenhouse Gas Protocol.

Scope 1 refers to direct greenhouse gas (GHG) emissions of a company, coming from sources owned or controlled by the company and that result from the burning of fossil fuels.

Scope 2 refers to indirect GHG emissions from the generation of purchased electricity, heat or steam consumed by the company for the manufacture of its products.

Scope 3 refers to other indirect GHG emissions that are a consequence of the company’s activities, but occur from sources not owned or controlled by the company (examples: extraction of purchased materials for the manufacture of the company’s products, transport of employees and clients that come to buy the products, etc.).

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Which scopes of emissions are included in the methodology?The methodology currently accounts for scope 1 emissions, and scope 2 emissions (excluding the aviation, power generation and cement industries, for which scope 2 is inconsequential or poorly reported). We have not incorporated scope 3 emissions in the methodology, as they are poorly reported or not reported consistently by companies, and are not integrated in current climate scenarios. For these reasons, including scope 3 emissions at this point could make the results inconsistent and less accurate. We are working to incorporate scope 3 emissions, for sectors whose scope 3 represents a major part of their emissions (oil & gas and automotive), when we can fully trust the data quality and stand behind the accuracy of these results.

What is a ‘climate scenario’?A climate scenario provides an emissions reduction pathway to limit the temperature increase to a given value depending on the scenario. This can be either for the global economy or for sectors of the global economy.

For SDA sectors (see explanation above), Lyxor’s methodology uses the scenarios developed by the International Energy Agency (IEA) in its Energy Technology Perspectives (ETP). For GEVA sectors (see explanation above), Lyxor’s methodology uses the Representative Concentration Pathway (RCP) scenarios developed by the Intergovernmental Panel on Climate Change (IPCC).

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RESULTS INTERPRETATIONHow should I interpret the results I see? The COtool shows results such as “compatible” or “incompatible” with the goals of the Paris Agreement. The user should remember that this compatibility is under certain conditions and assumptions:

► The measure is done for a 5-year time horizon. It does not and cannot indicate the alignment of a portfolio at a 2100 time horizon, which is the Paris Agreement time horizon. The time horizon of the approach is limited to 5 years because forecasts are unreliable beyond this point.

► The methodology only incorporates scope 1 and 2 emissions (with some exceptions) for corporate issuers, and does not cover overall global emissions, especially emissions generated by consumers or sovereigns.

For maximum accuracy, the result can be interpreted in the following way: “the temperature result shows the compatibility of a given portfolio with the Paris Agreement, at a 2025 time-horizon, for scopes 1 and 2 emissions”.

How can a high-carbon sector be 1.5°C or 2°C compatible?Some funds and sectors that are highly carbon-intensive can be aligned with a transition pathway below 2°C. This is because their past and future volumes of emissions (according to the forecasts) are lower than the volumes suggested by the scenario for this sector.

A sector is considered as “aligned” if it decreases its emissions at the rate suggested by the climate scenario, even if the sector continues to generate important volumes of emissions.

How can a low-carbon sector have a high temperature?The methodology applies the GEVA approach to sectors with low contributions to global emissions. In this approach, all sectors are expected to decrease their emissions at the same rate as the global economy. Therefore, even the low-carbon sectors must reduce their emissions.

Because they generate low volumes of emissions, these companies are usually under less pressure to reduce their emissions. In some cases they are not decreasing their emissions at a rate compatible with climate alignment in accordance with the GEVA approach.

How can an ESG ETF have a high temperature? An ESG index overweights issuers that have high ESG scores according to its rating methodology, which has a wider scope than the climate alignment measurement. An issuer that is unaligned with the Paris Agreement goals can have a high rating on social and governance topics, and these good results can compensate a low score on environmental side to result in a strong ESG score.

An ESG index may overweight these issuers with high ESG scores, but as they are are also unaligned with the Paris Agreement goals, the ESG ETF can have a high temperature and/or a higher temperature than its parent index.

How can an ETF have a higher carbon intensity and low temperature?Carbon intensity is a snapshot of the level of emissions of portfolios. The carbon intensity will give you information on how carbon-intensive your portfolio is today, whereas the temperature will give you information on whether your portfolio is on a decarbonisation pathway compatible with the Paris Agreement goals. Therefore, a fund that is carbon-intensive today, with commitments to reduce that carbon intensity in line with a low temperature scenario, will be aligned with the Paris Agreement despite its high current emissions.

For example, the German DAX30 is aligned to 1.5°C, despite the high share of coal in its power sector. The carbon intensity figure tells us that the index is carbon-intensive today. The temperature shows that the index is on a pathway aligned with the Paris Agreement. While the DAX contains several companies in the power sector which account for high volumes of emissions, through our alignment approach, they appear as temperature aligned. This is because they have taken strong commitments to reduce their emissions, in some cases more ambitious than their expected SDA decarbonisation trajectory.

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Why is a temperature result different from another I’ve seen? There are several methodologies to measure alignment of investment funds. Even though many methodologies propose the same output, i.e. temperature, they are based on different approaches, assumptions, data and calculation steps. These differences explain why two methodologies that both calculate a temperature can result in two different temperatures for a same index, just as differing ESG rating methodologies can result in different ESG scores for the same company.

Why can temperature results vary from a month or year to another?There are a few reasons why a fund temperature might vary:

► Changes in the fund composition and weightings in the fund

► Variations of enterprise value among issuers in the fund (fluctuations of their market capitalisations, increase or decrease of their debt, available cash, etc.)

► Effective reduction of emissions of issuers in the fund

► Change in theoretical carbon budgets from updated climate scenarios

► Expansion of Trucost database with new data for issuers that were not covered until now

A decrease of a fund temperature is not necessarily due to a real reduction of emissions of issuers in a fund. An increase is not necessarily due to higher emissions.

What is a carbon budget?A carbon budget is a theoretical maximum volume of emissions that a company or a fund can generate to stay aligned with a decarbonisation trajectory that aims to limit the temperature increase to a given value.

Why does Lyxor display a precise temperature for some funds and only a range of temperature for other funds?The possible temperature ranges for a fund are the following:

► < 1.5°C,

► 1.5°C – 2°C,

► 2°C – 3°C,

► > 3°C.

For funds whose range of temperature is between two temperature thresholds (1.5°C – 2°C and 2°C – 3°C), a linear interpolation is done to estimate a fund’s temperature. For funds whose temperature is below 1.5°C or above 3°C, no interpolation is done to limit any risk of counter-intuitive results.

Does the weighted average (in AuM) of temperatures of issuers in a fund equal the portfolio temperature?No, the weighted average in AuM of temperatures of issuers in a fund does not mathematically equal the portfolio temperature. A portfolio temperature calculation is based on the calculation of volumes of emissions under or over a theoretical carbon budget. Calculating a weighted average in AuM of issuers’ temperatures would assume that the influence of an issuer over a portfolio temperature only depends on its weight (in terms of AuM) in the portfolio, without consideration of its sector.

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Does the weighted average (in AuM) of temperatures of the SDA part and the GEVA part of the portfolio equal the portfolio temperature?No, the weighted average in AuM of SDA and GEVA temperatures of a portfolio does not equal the temperature of a portfolio. A portfolio temperature calculation is based on the calculation of volumes of emissions under or over a theoretical carbon budget. A portfolio in which the SDA share is small can see its temperature largely influenced by this small SDA share, if the volumes of emissions under or over the carbon budget are consequential for this SDA part.

What information related to climate alignment is available in Lyxor’s public factsheets?We report the climate alignment of a fund in public factsheets only if the temperature measure covers more than 80% of the total amount of assets under management in the fund. Below this coverage rate, no data related to climate alignment are reported in the fact sheets.

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There are several approaches to measure a portfolio’s alignment with the Paris Agreement. These approaches can result in different outcomes due to different structural assumptions in the models. Lyxor’s climate alignment approach results in a simple and easily understandable temperature indicator. However, like every approach to measure a fund’s climate alignment, the approach has some limitations, which are described below. Consequently, the temperature results communicated by Lyxor on its funds can only be used as a support for evaluation and investment portfolio steering. Lyxor should not be held liable for any decision based or on reliance on the alignment measures.

This document is for informational purposes only and does not constitute, on the portfolio management company, an offer to buy or sell or a solicitation or investment advice, and must not be used as a basis or be taken in account for any contract or commitment. The information contained in this document is established on extra financial data basis available from various reputable sources. However, validity, accuracy, exhaustiveness and relevance of this information are not guaranteed by Lyxor. In addition, the information was issued at a given time, and is therefore likely to vary at any time. This information is subject to change without any prior notice and Lyxor shall not be obligated to update or revise the document. Lyxor disclaims any and all liability relating to information contained in this document and to a decision based or on reliance on this document. Persons receiving this document undertake to use the information contained therein in the limit of the sole assessment of their own interest. Any partial or total reproduction of the information of the document is subject to the prior express authorisation of Lyxor. Lyxor Asset Management (LAM) is a portfolio management company regulated by the Autorité des marchés financiers to conduct investment business in compliance with provisions of the UCITS (2009/65/CE) and AIFM (2011/61/EU) Directives. Lyxor International Asset Management (LIAM) is a portfolio management company regulated by the Autorité des marchés financiers to conduct investment business in compliance with provisions of the UCITS (2009/65/CE) and AIFM (2011/61/EU) Directives.