Carbon footprint 2025 (TCFD Report) – Etica Transizione Climatica

The carbon metrics used in the Equity and Corporate Bonds analysis are the following ones and are explicitly recommended by the TCFD:

• Relative Carbon Footprint: defined as the total scope 1 and scope 2 GHG emissions of the portfolio, directly attributable to the investor through its ownership share in companies’ total market value (also defined as “Emissions Exposure”), per million EUR invested. It is measured in tCO₂e/EUR million invested.
• Carbon intensity: defined as the total scope 1 and 2 GHG emission intensity of the portfolio (based on issuers’ revenues), directly attributable to the investor through its ownership share in the companies’ total market value. It is measured in tCO₂e/EUR million revenue.
• The Weighted Average Carbon Intensity (WACI): expresses scope 1 and 2 GHG emission intensity (based on issuers’ revenues), proportional to the issuers’ weight in the portfolio. Hence, this does not take the ownership share into account. It is measured in tCO₂e/EUR million revenue.

Figure 1 – Portfolio Overview, Climate Impact Assessment Transizione Climatica end 2024.

This is a positive overall result for the Etica Transizione Climatica fund.

The funds outperform the benchmark in terms of both carbon intensity and WACI. However, we perform slightly worse in terms of the relative carbon footprint. The Relative Carbon Footprint takes into account absolute exposure to emissions in relation to total invested value. This means that some of the issuers in the portfolio have higher absolute emissions than the benchmark. This is not surprising, given the benchmark’s high exposure to lower-emitting sectors, such as financial services and IT.

Despite the impact of some ‘heavy’ issuers, the weighted average and intensity in relation to revenues is lower. This is partly because, even in energy-intensive sectors such as materials, selected issuers are more efficient than their peers in the benchmark

Despite this, the performance is worse compared to last year, with a 18% increase in carbon intensity. However, we achieved a 33% improvement compared to the first year of analysis (2019).

The main reason for this increase can be attributed to the material sector.

Below is a breakdown of the sectors contributing to the portfolio’s emissions and their respective weights. Please note that, although the materials sector accounts for 6% of the total weight, it accounts for 56% of the total portfolio emissions.

Figure 3 – the sectors contributing to the portfolio’s emissions and their weight.

Between the end of 2023 and the end of 2024, the number of companies in the materials sector in our portfolio doubled leading to a significant increase in emissions.

This increase in issuers is primarily driven by financial considerations.

Nevertheless, the methodology remains robust, as evidenced by the decrease compared to 2019.

After the selection process, less than 10% of the total companies in this sector remain, and these demonstrate strong issuer selection.

The table below shows the progress made in reducing emissions in the Etica Transizione Climatica portfolio since 2019, as measured against the three core TCFD metrics.

Please note that we have achieved:

• -57.97% relative carbon footprint;
• -33.14% carbon intensity;
• -27.16% WACI.

Despite the increase in 2024, the overall results show a significant reduction in emissions compared to 2019.

The purpose of the scenario analysis is to examine the current and future emission intensity from the direct and indirect emissions of a company (GHG scope 1&2) to see which climate scenario it is aligned with, until 2050. Each company’s carbon budget is defined based on its current and estimated future market share.

The scenario analysis compares current and future portfolio’s GHG emissions with the carbon budget estimated in different IEA scenarios: Sustainable Development Scenario (SDS)^[3], Announced Pledges Scenario (APS) and Stated Policies Scenario (STEPS)^[4]. Each scenario is tied to a carbon budget, i.e. a limited amount of fossil carbon that can be combusted worldwide to remain within a certain temperature. The carbon budget changes depending on the scenario, with the Sustainable Development Scenario being the most ambitious one, consistent with a global temperature increase well below 2°C by 2100, compared to pre-industrial levels.

The analysis shows that the current state of the portfolio is in line with a 2050 SDS scenario. This means that, for the first time, the Etica Transizione Climatica has a potential temperature increase of 1.5°C.

Figure 4 – Aligment Analysis for Etica Transizione Climatica, ISS Climate Impact Report 2025.

Conversely, the benchmark exceeds the budget of the SDS scenario in 2026 and is associated with a temperature increase of 2.7°C by 2050.

The better performance of the portfolio compared to the benchmark is explained by two factors, linked to the sectorial allocation and the single stock selection:

1. The exclusion of most fossil activities from the portfolio
   According to Etica’s investment policy, there are no investments in companies operating in the Energy sector^[5].
2. A higher number of companies with a commitment to reduce emissions
   As of 31.12.2024, according to ISS, 90% of the portfolio’s value is committed to international climate goals and demonstrates future progress, against the 73% of the benchmark. Specifically, 71% of portfolio’s value (65% in the TCFD Report 2024) is covered by a GHG reduction target approved by the Science-Based Targets initiative (SBTi), against 52% of the benchmark. Note that only 3% of companies in the overall portfolio have no target on GHG emissions

Figure 5 – Climate Target Assessment, portfolio vs benchmark.

ISS has developed a model that estimates the transition value at risk for portfolios based on the International Energy Agency’s (IEA) net zero scenario.

For Etica Transizione Climatica, this value is very low at only 38.7 million: less than 5% of the total analysed value is potentially exposed to transition risk.

Figure 6 – Portfolio Transition Value at Risk by Sector Based on NZE2050 scenario.

As expected, the most exposed to this risk are in the materials sector. Despite this, these issuers are associated with a positive carbon risk rating. This synthetic measure evaluates an issuer’s capacity to manage climate risk and seize opportunities.

The portfolio’s performance exceeds that of the benchmark, with a greater proportion of issuers classified as ‘outperformers’ or ‘leaders’. This demonstrates the invested companies’ robust management of climate-related risks and opportunities.

Unconventional and controversial energy extraction, such as fracking and Arctic drilling, is a key focus for investors from both a transition and a reputation risk perspective.

Etica Transizione Climatica has no direct exposure to such activities.

The transitional climate risks analysis dives also into the power generation mix of the portfolio.

Of the overall power generation installed capacity by companies in the portfolio, over 81% comes from renewables, against almost 18.31% from thermal power. This is a significant improvement on last year’s figure of 73%. This increase was due to issuers increasing their renewable energy output by 19,634 GWh compared to last year’s analysis, and to financial consideration to invest in EDP SA, which generates 85% of energy from renewable sources.

In addition, the portfolio also outperformed the benchmark, with the share of renewable energy capacity at around 25% and the share of thermal capacity at 50%.

Figure 7 – Transitional climate risk analysis on Etica Transizione Climatica portfolio as of 31.12.2024.

Only five companies are involved in fossil fuels: A2A, EDP (New), Hera, Ørsted^[6] and SSE Plc.

The four stable companies in the portfolio have reduced their thermal production by approximately 23.7%. Furthermore, these companies produced 48,918.5 GWh of renewable electricity, accounting for 33% of the portfolio’s renewable capacity. They therefore play a critical role in the energy transition.

Moreover, as shown in the table below, the emission intensity of these five companies is significantly lower than that of their peers.

To highlight their important role in the transition, some of these utilities have also issued green bonds that contribute to the energy transition and environmental protection. These bonds represent 30% of the corporate green bonds in our portfolio at the end of 2024.

Finally, note that the portfolio’s current energy generation mix exhibits a higher proportion of renewables than the International Energy Agency’s Sustainable Development Scenario 2030, which anticipates 53% renewables by 2030 and 84% by 2050. Etica Transizione Climatica is also very close to achieving the 2050 target.

Figure 8 – Power Generation Exposure. Renewable energy is indicated by dark blue, while sky blue represents nuclear power and mid blue is for fossil fuels.

Even if the temperature increase is limited to 2°C, the climate system will change. This will include an increase in physical risks, such as floods, droughts and storms. This analysis evaluates the climate hazards that will have the greatest financial impact, considering how they might affect portfolio value^[7].

In this scenario, the portfolio value at risk by 2050 is estimated to be 5.9 EUR million, with the Consumer Discretionary, Consumer Staples and Information technology being the most exposed ones. This represents a 0.7% loss in the overall fund value. The value at risk rises to over 9.13 EUR million if a worst-case scenario is employed, assuming a temperature increase over 3.2°C.

Figure 9 – Physical Risk Analysis, ETC value at risk.

However, based on the ISS assessment, only 7% of issuers have a weak physical risk management strategy and 55% have a robust strategy.

Note that only 7% of Etica’s companies are not covered, compared to 29% of the benchmark.

Figure 10 – Physical Risk Analysis, risk management portfolio vs benchmark.

• 1 – Comparison of results of Etica Transizione Climatica with Valori Responsabili portfolio

In December 2021, Etica adopted a stricter selection policy for companies involved in fossil fuels activities, including natural gas. In September 2022, the selection policy was further developed to include a specific climate impact assessment of companies involved in any fossil-related activities and those operating in Utilities, Materials and Industrial sectors with high emission intensity. The assessment is slightly different between Valori Responsabili and Etica Transizione Climatica, as a higher standard is set for Etica Transizione Climatica.

Nevertheless, the carbon intensity of the two funds is essentially the same.

The reason for this lies in financial considerations that result in a different sector’s weight allocation, particularly in the IT sector. The IT sector is significantly underweighted in the ETC portfolio compared to the VR portfolio. Furthermore, the Materials sector has a greater weight.

• 2 – New scenario analysis including scope 3 emissions

Starting from this year, the ISS has provided updated net zero scenarios from the IEA that replace the SDS and include scope 3 emissions.

The net zero scenario comprises three ways of projecting emissions up to 2030 and 2050.

1. Historical projections: the results of the issuer’s alignment or divergence versus the allocated carbon budget, projecting historical emissions.
2. Target projections: the results of the issuer’s alignment or divergence versus the allocated carbon budget, projecting potential emissions based on the issuer’s target. If there is no target, the issuer is associated with the relative benchmark projection.
3. Benchmark projections: the results of the issuer’s alignment or divergence versus the allocated carbon budget, projecting the potential emissions associated with each sector.

Below are the results of the first analysis.

Figure 11 – IEA updated scenario analysis including scope 3 emissions.

The results are good overall, especially since the climate assessment in the Scenario Pillar currently doesn’t incorporate scope 3 emissions. Scope 3 emissions are only evaluated in the Target Pillar.

This is reflected in the scenario assessment above, which shows that the target projections are associated with a net-zero scenario.

The projected historical emissions are associated with an increase of 2.1°C. While this is not a fully satisfactory result, it should be noted that Scope 3 emissions are, by definition, beyond the control of companies, and being very close to the 2°C target of the Paris Agreement is a good achievement.

However, the portfolio continues to perform better than the benchmark under all three projections.

The portfolio shows positive results in terms of carbon metrics, performing better than the benchmark. Despite worse performance compared to last year, there has been a significant reduction in emissions compared to 2019:

• 58% reduction of carbon footprint;
• 33% reduction of carbon intensity;
• 27% reduction of WACI.

Furthermore, the fund continues to be aligned to a potential temperature increase of 1.5°C, with an overshoot in the carbon budget observed only in the conventional electricity subsector.

From a transitional perspective, the role of this fund is clear: over 81% of the overall power generation installed capacity of companies in the portfolio comes from renewables.  This is a significant improvement on last year’s figure, and also very close to the IEA’s 2050 power generation exposure scenario.

The fund has also invested in green bonds issued by the utilities sector, highlighting its contribution to the transition.

Finally, transitional and physical risk remain very low, with robust risk management by companies. 

This Sovereign analysis compares the carbon emissions and other carbon related characteristics of the underlying portfolio with the benchmark.  The tables below include absolute and relative figures for portfolio carbon emissions as well as intensity measures for both production and government emissions.

“Emission Exposure” section measures the carbon footprint of a sovereign portfolio.  Scope 1 Emissions are in tCO₂e while Scope 2 and Scope 3 Emissions are only in CO₂ Emissions.

Relative carbon footprint is defined as the total carbon emissions of the portfolio per million invested.  

Carbon intensity is expressed as the weighted average carbon emissions per million of PPP adj GDP as a proxy of the carbon efficiency per unit of output.

To account for the different calculation possibilities as well as to offer various perspectives, ISS ESG provides data for the following two different sovereign emission categories:

1. Production Emissions: Emission footprint of a country’s production with its imports according to the latest PCAF guidelines released in December 2022.
2. Government Emissions: This approach takes into account that a government bond co-finances both direct emissions from the public sector and investments made by the government. This approach is no longer recommended by PCAF. However, ISS will still provide in the time being government emissions.

In general, the fund’s performance is in line with the benchmark and last year’s analysis.

This is because the composition of the sovereign portfolio has not changed significantly and remains in line with the benchmark composition and last year’s portfolio.

Please note that the methodology does not currently account for any strong climate selection for the sovereign issuer.

Furthermore, this analysis does not consider the type of bond but only assesses the climate performance of individual countries.

The type of bond consideration could be an area for improvement in the 2026 analysis.