Investing in a low-carbon transition: Carbon footprint savings with green MSCI indices

Green equity index providers claim that they can play a central role in allocating capital towards decarbonization. This study verifies this claim by analysing the environmental performance of 20 MSCI equity indices comprising 5267 constituents in 50 countries over the period 2015-2022. In each region (the World, the U.S., Europe, Emerging Markets), we analyse four MSCI green indices, namely Climate Change (CC), Paris-Aligned Benchmark (PAB), Socially Responsible Investment (SRI), and SRI Filtered PAB (SRI PAB), relative to the MSCI standard index. Our aggregated index-level regression reveals that the green criteria employed by MSCI statistically and significantly contributed to CO₂ emissions reductions for all examined green indices, and better environmental/ESG ratings for the CC, SRI, and SRI PAB indices. This relationship is robust to aggregated index-level control variables, various subsamples, and alternative emissions measures provided by Refinitiv, Bloomberg, and CDP. An investment of US$1000 in January 2015 in the CC, PAB, SRI, and SRI PAB indices (instead of the standard index) respectively resulted in an average reduction of 982 kg (-53 %), 1429 kg (-77 %), 1147 kg (-61 %), and 1355 kg (-73 %) CO₂ emissions at the end of December 2022. The robust environmental outperformance of Paris Agreement-aligned indices suggests that they should be embedded in benchmark regulations and granted preferential capital treatment. Institutions should set low-carbon targets to guide asset managers towards green ETF investments to accelerate the low-carbon economy transition. Our study also stresses the importance of improving transparency, standardizing ESG performance metrics, and rating criteria to support green investing.