2025 Crude Oil Fundamental Preview

Commodity

Economic

Summary:

See a preview of our 2025 Crude Oil Outlook report!

Crude oil prices in 2025 are set to be influenced by a mix of competing forces: China’s economic policies, Trump’s energy agenda, OPEC strategies, geopolitical conflicts, and the global shift to clean energy. The market remains range-bound, with uncertainty delaying a decisive breakout. Will 2025 be the year a clear direction emerges?

Key Events:

OPEC and IEA Divergent Forecasts;

China’s Monetary Policies and Demand Potential;

Geopolitical reformations and risk premiums;

Trump’s Drill baby Drill Agenda;

Clean Energy Transitions.

OPEC and IEA Forecasts

OPEC issued its fifth consecutive downward revision in December for 2024 oil demand forecasts, accompanied by another cut for 2025, citing economic growth risks in key markets like China. This marks the largest adjustment since June, following the group’s decision to extend output cuts. The 2024 demand estimate was reduced from 1.82 million barrels per day (bpd) to 1.61 million bpd, while the 2025 forecast dropped from 1.54 million bpd to 1.45 million bpd. Despite these cuts, the global oil market is projected to return to a surplus in 2025, driven by increased production from non-OPEC members.

In contrast, the IEA predicts accelerated demand growth, with oil consumption rising from 840,000 bpd in 2024 to 1.1 million bpd in 2025, reaching a total of 103.9 million bpd. This increase is primarily attributed to petrochemical feedstocks, while transport fuel demand continues to lag due to technological advancements and changing consumer behavior.

These contrasting forecasts from OPEC and the IEA underscore the uncertainty surrounding oil prices, keeping the market in a range-bound consolidation phase. The longer this persists, the sharper and more decisive the eventual breakout—bullish or bearish—is expected to be.

China’s Monetary Policy and Demand

China is set to implement a “moderately loose” monetary policy in 2025, marking its first such move in 14 years. The last instance of this approach occurred during the 2008–2009 financial crisis, when China stimulated its economy through interest rate cuts, reserve requirement reductions, and increased fiscal spending. These measures spurred rapid credit expansion, economic growth, and inflation but were scaled back in 2011 to mitigate bubble risks.

While the specifics of China’s 2025 policy remain unclear, a similarly aggressive approach is anticipated as a response to potential trade conflicts under Trump’s administration. If successful, this stimulus could significantly boost oil demand and shift forecasts to the upside. However, failure to achieve the desired economic impact—coupled with 2025’s oversupply risks from non-OPEC producers—could add notable bearish pressures.

Trump’s “Drill Baby Drill” Agenda

Risks of oil overproduction are expected to dominate headlines in 2025, driven by Trump’s "Drill Baby Drill" agenda and Treasury Secretary Bessant’s 3-3-3 plan. The plan aims to increase oil output by 3 million barrels, achieve 3% GDP growth, and reduce the budget deficit by 3%. This oversupply strategy challenges OPEC+ countries, which had planned to unwind voluntary supply cuts initiated in 2022. To stabilize the market, OPEC+ extended these cuts through April 2025, though persistent downward revisions in demand forecasts—compounded by China’s economic contraction—highlight ongoing challenges.

Clean Energy Transitions

According to the IEA’s latest report, the global market for clean technologies—including solar PV, wind turbines, electric vehicles, batteries, electrolysers, and heat pumps—is projected to triple to over $2 trillion by 2030. This surge in clean energy adoption poses a significant challenge to oil demand forecasts, contributing to bearish sentiment. However, critics highlight the environmental limitations and inefficiencies of renewables, emphasizing the irreplaceable role of oil in the global energy mix. These contrasting views support the uncertainty in oil prices.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Commodity

Economic

Crude Oil 3 Month Outlook – Log Scale

Starting with crude oil's ascending channel, which extends from the historical lows of the 1800s, the respected Fibonacci channel ratios highlight oil's 2023–2024 range, constrained between the 0.786 Fibonacci support and the 0.618 resistance. In simpler terms, oil prices have maintained a range between the $64 support and the $90 resistance zones.

As 2024 concludes, prices are testing the 0.786 support level, with downside risks looming. A firm break below $64 could trigger a decline toward the channel's lower border, a zone between $49 and $43, which has only been breached during the COVID-19 collapse.

On the upside, the $90 resistance remains a critical level, followed by the 2023 high at $95. A breakout above these levels could pave the way toward the next resistance at $120, aligning with the 50% Fibonacci retracement and the mid-channel level. Such a surge would likely require a scenario of improved demand outlook and supply disruptions followed by geopolitical conflicts to materialize.

Crude Oil Weekly Outlook – Log Scale

From a weekly perspective, the chart is structured as follows:

Uptrend from 2020 to 2022;

Retracement between 2022 and 2023;

Consolidation/sideways pattern from 2023 to 2024.

The current consolidation is holding above the 50% Fibonacci retracement of the 2020–2022 uptrend. However, bearish risks are increasing following a downside breakout from the yearlong triangle pattern. A minor consolidation has also emerged below the triangle’s border, resembling a potential head and shoulders continuation pattern, with shoulders forming just above a 4-year support extending from the December 2021 lows.

To confirm further downside, a firm close below this key support is required, which could accelerate the retracement toward the 0.618 Fibonacci level at $55, with additional risks extending to $49.

On the upside, if the 4-year support holds, it may signal the end of the retracement, paving the way for a resumption of the primary uptrend. This could see crude oil prices retest the 2023 highs (95) and potentially the 2022 peaks (120).

Crude Oil 3 Day Outlook – Log Scale

Dropping to the 3-Day timeframe, crude oil remains within a down trending parallel channel extending from the upper border of the previous triangle pattern. This aligns with the triangle breakout target and a potential head and shoulders continuation pattern, which is still forming below the triangle’s boundaries. The Relative Strength Index (RSI) hovers below the 50-neutral zone, signaling the potential for another reversal or a bullish breakout.

While the broader trend leans bearish—in line with the sentiment for 2025—a decisive break below the 4-year support zone is required to confirm the next leg down. A firm break below $64 could trigger declines toward $60 (psychological support), $58 (lower channel border), and $55 (0.618 Fibonacci retracement of the 2020–2022 uptrend). Further downside risks could extend to the bottom border of the historical channel, ranging between $49 and $43.

On the upside, short-term resistance lies between $72 and $72.70, followed by the triangle thrust point near $78. A breakout above these levels could signal a return to bullish momentum, targeting the $80s zone with resistance levels at $84, $88, and $95, and potentially paving the way for a rally back toward 2022 highs above $100 per barrel.

Oil prices remain dominated by uncertainty, caught between bullish and bearish forecasts. The ongoing consolidation leaves prices range-bound, but the longer this phase persists, the steeper and more decisive the eventual breakout—in either direction—may be.

To stay updated on all economic events of today, please check out our Economic calendar

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Glendon

Economic

Building a diversified portfolio is one of the cornerstones of successful investing. Whether you’re new to investing or a seasoned pro, diversification allows you to balance risk and optimize the potential for returns. The key is to spread your investments across different asset classes, industries, and geographical regions to reduce the impact of volatility in any one area. In this article, we’ll explore how to build a diversified portfolio, why diversification is important, and strategies to make sure you achieve a well-rounded investment approach.

Why Diversification is Key to Successful Investing

At its core, diversification is about managing risk. No single investment is without risk, but spreading your investments across various asset classes can help mitigate the potential for large losses. The idea is simple: when one asset class underperforms, others may perform better, thereby helping balance out the losses.

In practical terms, diversification minimizes the chances that your entire portfolio will suffer significant losses during market downturns or times of economic uncertainty. For example, stocks may perform poorly in a recession, but bonds and commodities may hold up better. This balance allows investors to reduce the overall volatility of their portfolios.

Moreover, diversification is about enhancing the potential for returns. By including a variety of assets, you can tap into different sources of growth, improving your chances of achieving better overall performance.

1. Assess Your Risk Tolerance and Financial Goals

Before you start selecting assets, it’s crucial to understand your risk tolerance and financial goals. Your risk tolerance is the amount of risk you are willing and able to take on. Are you a conservative investor who prefers stability, or are you more aggressive and open to higher risk for potentially higher rewards?

Your financial goals—whether it's saving for retirement, buying a home, or funding your child’s education—will also play a key role in determining your investment strategy. If you’re planning for retirement in 30 years, you may be able to take on more risk with a higher allocation to stocks. On the other hand, if you’re saving for a short-term goal, such as buying a house in the next few years, you might want a portfolio with a higher percentage of safer investments like bonds or cash equivalents.

Knowing your risk tolerance and goals will guide your asset allocation decisions and help you balance your portfolio in line with your objectives.

2. Spread Your Investments Across Asset Classes

A well-diversified portfolio includes a mix of different asset classes. Here are some key asset types to consider when building your portfolio:

Stocks (Equities): Stocks are a cornerstone of most investment portfolios. They offer growth potential, but also come with higher volatility. Investing in different sectors (technology, healthcare, consumer goods, etc.) and geographic regions (domestic and international) can help reduce risk within the stock portion of your portfolio.

Bonds: Bonds are typically considered safer than stocks. They provide regular income and can act as a stabilizing force in your portfolio during times of stock market volatility. Depending on your risk tolerance, you can include government, municipal, or corporate bonds in your portfolio.

Real Estate: Real estate can be a great way to diversify, especially if you're looking for assets that may perform differently than stocks and bonds. You can invest directly in real estate (buying property) or indirectly through Real Estate Investment Trusts (REITs), which offer exposure to commercial or residential properties.

Commodities: Commodities like gold, silver, and oil often perform well when stocks are under pressure, making them a solid hedge against inflation and market downturns. Commodities can add another layer of protection to your diversified portfolio.

Cash and Cash Equivalents: Cash may not offer high returns, but it provides safety and liquidity. Having a portion of your portfolio in cash or short-term investments (like money market funds) can be beneficial for times when you need to access funds quickly.

3. Diversify Within Each Asset Class

Diversification isn’t just about mixing different asset types—it’s also important to diversify within each class. Here are some examples:

Within Stocks: Rather than investing in just one company or sector, consider spreading your stock investments across various industries. For example, you can invest in technology, healthcare, financials, and consumer goods sectors. You can also choose both large-cap companies (established businesses) and small-cap companies (which may offer higher growth potential but come with more risk).

Within Bonds: Not all bonds are created equal. You can diversify your bond holdings by selecting different types, such as government bonds, corporate bonds, or municipal bonds. You can also vary your bond investments by maturity and credit rating. For example, short-term bonds tend to be safer, while long-term bonds may offer higher yields but come with more interest rate risk.

Within Real Estate: If you’re investing in real estate, consider diversification by geographic location and property type. For example, you could invest in residential properties in one area and commercial properties in another. REITs also provide a way to diversify within real estate by holding different types of properties or real estate portfolios.

4. Regularly Rebalance Your Portfolio

Building a diversified portfolio is only part of the equation. To maintain a balance that aligns with your goals, you should regularly rebalance your portfolio. Over time, certain assets in your portfolio may outperform others, leading to shifts in your overall allocation. For example, if stocks perform well, they may represent a larger portion of your portfolio than originally planned, making your portfolio riskier than it should be.

Rebalancing involves adjusting your portfolio to bring your asset allocation back in line with your original plan. This may mean selling some of your higher-performing assets and buying more of the underperforming ones to maintain a balanced, diversified mix.

5. Stay Consistent and Be Patient

Finally, building a diversified portfolio is a long-term strategy. It’s essential to stay consistent with your investments and be patient. Market fluctuations are inevitable, but a well-diversified portfolio is designed to withstand them over time. By maintaining a diversified approach, avoiding emotional reactions to short-term market movements, and sticking to your investment plan, you can increase your chances of achieving long-term financial success.

Conclusion: The Power of a Diversified Portfolio

Building a diversified portfolio is one of the smartest ways to manage risk and increase your chances of achieving your financial goals. By spreading your investments across different asset classes and within each class, you can create a balanced approach that helps protect you during market downturns while still offering opportunities for growth.

Remember, diversification is not about eliminating risk entirely, but about managing it in a way that supports your financial goals. With the right strategy, patience, and regular adjustments, a diversified portfolio can be the foundation for long-term financial success.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Economic

When it comes to building a diversified investment portfolio, corporate bonds are often an underappreciated asset class. While equities tend to grab the spotlight, corporate bonds offer a range of unique benefits that can help investors achieve their financial goals, whether they’re seeking a steady income, reducing risk, or diversifying their holdings. In this article, we’ll explore the key benefits of investing in corporate bonds and why they deserve a place in your investment strategy.

1. Steady Income Generation

One of the most compelling reasons to invest in corporate bonds is the regular income they provide. Corporate bonds pay interest at fixed intervals—usually semi-annually or annually—making them an attractive option for investors who are looking for predictable income streams.

Unlike stocks, which depend on dividends that can fluctuate depending on company performance, corporate bondholders are guaranteed a fixed interest payment for the life of the bond (unless the company defaults). This makes bonds particularly appealing for retirees or those who need a reliable source of income without the volatility of equities.

The interest rate, or coupon, paid on corporate bonds is typically higher than what you'd receive from government bonds, reflecting the additional risk that comes with investing in corporate issuers. The higher yields, especially in comparison to traditional savings accounts or CDs, make corporate bonds an effective tool for growing your portfolio over time.

2. Lower Risk Compared to Stocks

While all investments carry some level of risk, corporate bonds generally offer a lower risk profile compared to stocks. This is because bondholders have priority over shareholders when it comes to claims on a company's assets in the event of liquidation. If a company faces financial difficulty, bondholders are more likely to recover at least a portion of their investment, whereas shareholders may lose their entire investment.

Additionally, corporate bonds are less volatile than stocks. Stock prices can fluctuate significantly based on company performance, market sentiment, or broader economic factors. Bonds, on the other hand, typically experience less price movement unless there is a significant change in the issuer’s creditworthiness or interest rates. This makes bonds an attractive choice for investors looking to balance risk in their portfolios.

Of course, the risk level of corporate bonds varies based on the issuing company’s credit rating. Bonds issued by companies with higher credit ratings (like those from established blue-chip companies) are generally safer, whereas bonds from companies with lower credit ratings (junk bonds) carry higher risk, but also offer higher returns.

3. Diversification Benefits

Adding corporate bonds to your portfolio can provide diversification, which is crucial for managing risk. A well-balanced portfolio typically includes a mix of asset classes, such as stocks, bonds, and other investment vehicles. Corporate bonds, particularly from a variety of industries, can help offset the volatility in equity markets and reduce the overall risk of your portfolio.

In times of stock market turbulence or economic uncertainty, corporate bonds often behave differently from equities. For example, when stock prices are falling due to a downturn, bond prices might rise as investors flock to safer assets. By holding both stocks and bonds, you create a hedge that can help protect your investments during market fluctuations.

Furthermore, corporate bonds from different sectors or regions can reduce the risk associated with a concentrated portfolio. For instance, if you hold bonds from companies in industries like technology, healthcare, and utilities, the performance of one sector may offset the poor performance of another, resulting in a more stable overall portfolio.

4. Capital Preservation

For conservative investors or those approaching retirement, capital preservation is often a top priority. Corporate bonds provide an opportunity to preserve capital while still earning a return. As long as the bond issuer doesn’t default, bondholders are guaranteed to get their principal back at maturity.

This makes corporate bonds an attractive alternative to more volatile investments like stocks or commodities, which may fluctuate wildly in the short term. The predictable nature of corporate bonds allows investors to plan their financial future with greater confidence, knowing that they have a reliable source of return.

It’s important to note that not all corporate bonds are equal in terms of safety. Bonds from highly rated, financially stable companies offer the greatest assurance that your principal will be returned. In contrast, bonds from lower-rated companies carry higher risk, but can offer greater returns in exchange.

5. Potential for Capital Appreciation

While the primary benefit of corporate bonds is the income they provide, it’s possible for bonds to appreciate in value as well. If interest rates fall or a company’s creditworthiness improves, the price of a corporate bond can rise, allowing investors to sell the bond for a profit before maturity.

This is particularly true for bonds with longer maturities or those with higher coupon rates. Investors who purchase bonds when they are undervalued or when interest rates are high may be able to sell them at a higher price as conditions improve.

For example, if you purchase bonds when the interest rate environment is unfavorable, and rates later decline, the price of your bonds could rise as newer bonds are issued at lower rates. This could give you an opportunity to sell your bonds at a profit before they reach maturity.

6. Tax Benefits (Depending on the Issuer)

Corporate bonds may also come with tax benefits, particularly if they are issued by companies that qualify for certain tax exemptions. For instance, if you invest in bonds from certain types of corporations or under specific tax-friendly conditions, you could benefit from tax-exempt income or reduced tax rates.

While corporate bonds are generally subject to federal and state taxes, it’s worth exploring options like municipal bonds or corporate bonds that may have favorable tax treatment in your region.

Conclusion: Why Corporate Bonds Should Be Part of Your Investment Strategy

Investing in corporate bonds offers a range of benefits that can help diversify your portfolio, reduce risk, and provide a steady income stream. Whether you’re a conservative investor looking for capital preservation or a more aggressive investor seeking higher returns, corporate bonds can play a valuable role in achieving your financial goals.

As with any investment, it's important to carefully assess the risks, especially when it comes to the creditworthiness of the issuing company. But for those seeking stability, reliable income, and a balanced approach to investing, corporate bonds are a smart option to consider.

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Glendon

Economic

The Israel-Palestine conflict, one of the most complex and longstanding geopolitical issues in the world, has far-reaching implications beyond the borders of the Middle East. While political analysts and diplomats focus on peace efforts, the impact of such conflicts on financial markets—particularly the forex market—cannot be ignored. In this article, we explore the direct and indirect effects of the Israel-Palestine conflict on global forex markets, and what traders and investors need to know to navigate periods of heightened geopolitical uncertainty.

1. Geopolitical Tensions and Safe-Haven Currencies

One of the immediate responses to the Israel-Palestine conflict, as with most geopolitical crises, is the flight to safe-haven assets. During periods of instability, investors tend to seek currencies that are perceived as stable and low-risk. In the context of the forex market, this typically includes the US Dollar (USD), the Swiss Franc (CHF), and the Japanese Yen (JPY).

US Dollar (USD): The USD often strengthens during global crises due to its status as the world’s primary reserve currency and its backing by the US economy. With the Middle East being a key geopolitical hotspot, traders and investors may flock to the USD as a store of value during uncertain times.

Swiss Franc (CHF): Switzerland’s political neutrality and strong economic fundamentals make the CHF a popular choice in times of geopolitical uncertainty. The Swiss economy is less exposed to regional tensions, making the currency a preferred safe-haven option.

Japanese Yen (JPY): Similarly, the Japanese Yen benefits from being another safe-haven currency, particularly during global crises. However, its performance can also be influenced by the global risk sentiment and the state of Japan's economy.

2. Oil Prices and Currency Volatility

The Middle East plays a pivotal role in global oil production, and the Israel-Palestine conflict can lead to volatility in oil prices. Fluctuations in oil prices can have significant ripple effects on forex markets, particularly for currencies of oil-producing nations.

Oil-Dependent Currencies: Currencies of nations that rely heavily on oil exports, such as the Canadian Dollar (CAD), Norwegian Krone (NOK), and Russian Ruble (RUB), tend to experience increased volatility when oil prices fluctuate due to geopolitical tensions. When oil prices rise due to fears of supply disruptions, these currencies may see an uptick in value, and conversely, a decline in oil prices can cause these currencies to weaken.

Emerging Market Currencies: Countries in the Middle East and North Africa (MENA) region, particularly those in close proximity to the Israel-Palestine conflict, may experience substantial fluctuations in their currencies as investors react to the potential for regional instability. The Egyptian Pound (EGP) and Jordanian Dinar (JOD), for instance, could see greater volatility during heightened tensions.

3. Regional Economic Impact and Trade Flows

Beyond the immediate flight to safety and oil price fluctuations, the Israel-Palestine conflict can disrupt trade flows in the region. Countries in the Middle East may experience delays in exports and imports, which can lead to reduced economic growth expectations and market instability. Currency traders often react to these shifts in trade balance, adjusting their positions based on the potential for a slowdown in regional growth.

Israel’s Economy: Israel is a highly developed economy with strong technological, defense, and financial sectors. Any escalation in the conflict may impact investor sentiment, leading to short-term weakness in the Israeli Shekel (ILS). However, Israel’s diversified economy and strong institutional framework may cushion these effects in the long term.

Palestinian Territories: The Palestinian territories face much more direct economic consequences from the conflict. While the Palestinian economy is heavily dependent on foreign aid and trade with Israel, any escalation can exacerbate the challenges of currency stability in these regions.

4. The Influence of International Diplomacy and Policy Responses

Forex markets are highly sensitive to changes in global diplomatic efforts and policy responses. During periods of escalating conflict, markets may react to the possibility of military interventions, sanctions, or ceasefires.

Military Actions and Sanctions: Forex markets tend to react negatively to military conflicts and the imposition of international sanctions. For example, if international bodies like the United Nations or the European Union were to sanction countries involved in the Israel-Palestine conflict, the affected countries’ currencies could suffer.

Peace Initiatives: Conversely, any sign of a de-escalation in the conflict or diplomatic progress could lead to optimism in the forex market, boosting regional currencies and creating opportunities for short-term gains.

5. How Forex Traders Can Navigate Geopolitical Risks

For forex traders, geopolitical risks, such as those posed by the Israel-Palestine conflict, require a strategy that accounts for heightened volatility. Here are a few tips for navigating such events:

Stay Informed: Follow news sources and official statements from global leaders and institutions to stay updated on developments that could impact currency markets.

Use Risk Management Tools: With increased volatility, it’s crucial to use tools such as stop-loss orders and position sizing to mitigate potential losses.

Diversify Your Portfolio: Diversifying your trades across multiple currency pairs and asset classes can help minimize exposure to sudden shifts in the forex market.

Conclusion: The Long-Term Impact of the Israel-Palestine Conflict on Forex Markets

The Israel-Palestine conflict is a complex issue with wide-ranging effects, not only in the political sphere but also in global financial markets. While the immediate impact on forex markets may be felt through safe-haven flows, oil price volatility, and regional trade disruptions, the longer-term effects will depend on how the situation evolves. Traders need to remain vigilant, adapt to changing market conditions, and implement risk management strategies to navigate these uncertain waters.

As with any geopolitical event, the key for forex traders is to remain flexible and prepared for market shifts. By understanding the multifaceted impact of the Israel-Palestine conflict on global currency markets, traders can position themselves to make informed decisions and capitalize on opportunities as they arise.

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BNP PARIBAS

Economic

Scope 3 emissions – indirect emissions that are not produced by a company but by independent members along its value chain – are increasingly being seen as the key to achieving decarbonisation in Asia and worldwide. During the BNP Paribas Sustainable Future Forum in Hong Kong and Singapore, the Transaction Banking team shared the results of a recent ESG survey commissioned by the Bank, which interviewed over 200 C-suite and senior executives across geographies and industries in Asia Pacific and discussed strategies in addressing Scope 3 emissions.

Scope 3 emissions – an important challenge

Cynthia Tchikoltsoff, Head of Global Trade Solutions APAC at BNP Paribas, noted that Scope 3 emissions typically represent 70% to 90% of corporate greenhouse gas (GHG) emissions. “But in reality, less than 15% of the companies we have surveyed are actively working on Scope 3. It is the most difficult part of GHG emissions to tackle.”

Eric Tran, Head of Sustainability Transaction Banking at BNP Paribas, used the example of the textile industry to demonstrate the situation, where as much as 97% of the emissions for multinational corporations can be in the upstream supply chain, with GHG emissions and waste resulting from outdated manufacturing practices and reliance on non-renewable sources for energy.“The funding gap to modernise the supply chain in the textile and apparel sector has been estimated at USD1 trillion,” he explained. “Investments are fragmented, and manufacturing suppliers may prioritise other areas in light of uncertainty on return on investment.”

Change lies ahead

However, corporates are making the change, and increasing regulation will fuel this trend. Momentum starts in the European Union, where the Corporate Sustainability Reporting Directive (CSRD) requires companies to report on Scope 3 emissions. While this is an EU directive, it has considerable impacts on other countries, including those in Asia: any non-EU company that has generated a net turnover exceeding EUR150 million in the EU in each of the last two consecutive financial years, or has at least one large or listed subsidiary on regulated markets in the EU with more than EUR40 million net turnover, is expected to progressively comply. So too are non-EU SMEs with debt or equity securities listed on a regulated market in the EU.

These reporting obligations, which will gradually kick in from 2024 to 2029, cast a wide net in Asia, with similar regulations being developed in the region. Singapore, Japan and Hong Kong, among other markets, are adopting the International Sustainability Standards Board (ISSB) principles to monitor their own climate-related risk exposure.

Driving ESG progress in a supply chain

How can progress be achieved? Leading corporates offer advice based on their experience. Schneider Electric has been reporting on sustainability for 20 years, with a comprehensive set of initiatives designed to reach net zero in operations by 2030 and the value chain by 2050. In 2021, the company developed a programme focused on Scope 3, involving the top 1,000 of its suppliers, which together generate more than 80% of CO2 emissions in Schneider Electric’s chain. As of Q3 2024, the company has already reached 36% decarbonisation of the targeted Scope 3 suppliers, putting it on track for the target of 50% by end of 2025.

The Group has managed this in part through a nuanced understanding of the realities facing suppliers. “Companies in general have different challenges in different stages,” said Alexandru Popa, Associate Principal, Sustainability Business Division at Schneider Electric. For those just starting on their sustainability journey, challenges may be around compliance and primary data collection. More advanced companies will have identified targets and created roadmaps, and for them the main challenge is “actually onboarding suppliers, getting their buy-in,” stated Popa. “It’s not very easy. Partnership and clear communication are key,” he added.

“The most advanced companies” Popa said, have engaged their suppliers and are ready to act on decarbonisation, “but there is a lot of noise out there and some don’t know where to start. To help those suppliers, it is important to build a robust programme with a very knowledgeable procurement team to assist them.”

A two-pronged approach

At Singapore-based real estate company CapitaLand, Scope 3 divides into 15 underlying categories, but Vinamra Srivastava, CapitaLand’s Chief Sustainability & Sustainable Investments Officer, explained that one should be clear on priorities.

He advises a “two-layer metric” in setting these priorities. “You cannot try to address all 15 categories. You want to see impact, and you also want to consider the feasibility of execution. Sometimes you do need quick wins to get the momentum going.” He also advises moving as quickly as possible from a spend-based analysis to a product carbon analysis.

He has found good results in “a combination of incentives and penalising measures in your procurement guidelines.” This involves insisting on particular standards within those guidelines, and implementing supply chain financing incentives to support suppliers who make the correct effort in their decarbonisation initiatives.

Corporates said several aspects help them in managing their Scope 3 emissions and assisting their supply chains to decarbonise. These include standardised supply chain practices, training suppliers, simplifying data reporting for SMEs, seeking transparency in labour practices at suppliers, and developing onshore facilities that reduce the carbon footprint associated with transporting materials.

In turn, these corporates rely on financial institutions and regulators to facilitate clean energy access to SMEs in emerging markets. “Renewable energy investments in certain markets may require greater regulatory clarity and coordination to reach their full potential,” said Anne-Laure Descours, Chief Sourcing Officer at PUMA Group.

Embrace partnership

Partnership is key in addressing supply chain sustainability. Scope 3 is “a very complex matter that requires a lot of collaboration within companies and across organisations, with financial institutions and suppliers,” outlined Tchikoltsoff.

Descours at PUMA believes the key to Scope 3 sustainability is “collaboration, partnership and transparency. Nobody can do it alone: this is such a large capex investment that it has to be open.” For example, PUMA ensures that it promises long-term business and commitment to its suppliers so that they feel safe to make major investments in sustainability. “If you don’t give them the safety net, they cannot invest.” PUMA’s partnerships around sustainable working capital for suppliers go back many years: one such arrangement with the International Finance Corporation (IFC) dates from 2016.

Descours explained, “Banks can help companies to create facilities that encourage decarbonisation in the supply chain, such as financing at lower rates if certain sustainability-related KPIs are achieved. That incentivises the right kind of behaviour.”

Descours also called upon banks to support local governments “to provide funding to give suppliers access to renewable energy.” Local government support is widely mentioned by corporates. By promoting corporate disclosure by SMEs, for example, these governments can help solve the Scope 3 issue.

One initiative by BNP Paribas seeks to enable transparency in supply chains by scaling disclosure, working with ESG agencies such as CDP to engage clients and integrate incentives tied to progress. “We have more than 100 suppliers who have been disclosing for the first time because of this system,” says Tran. This could lead to lower financing costs, which can help offset some of the costs of disclosure and verification.

Companies have a further incentive to be a leader on Scope 3, with ESG-conscious funds reallocating investment towards companies meeting higher GHG emissions standards, affecting market valuations.

“ESG issues on supply chains are embedded in the whole process of our investment. Supply chain practices contribute up to 16% in the ESG scoring methodology,” said Crystal Geng, ESG Research Asia Lead at BNP Paribas Asset Management. This includes a comprehensive screening process for issues including human rights, labour standards and environmental considerations; engagement efforts to improve the upstream and downstream supply chain in certain industries; and investing more in companies with green procurement policies and supplier standards. Therefore, a climate-resilient and equitable supply chain should be not only sustainable but a driver of market performance.

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UBS

Economic

Exhibit 1: Benchmark and index provider selection

Multi-step iterative process comprising quantitative and qualitative analysis

Benchmark selection

It is estimated that more than three million indexes are calculated daily by the major index providers. With such multitude of indexes available, a methodical and objective approach to benchmark selection is helpful in selecting a suitable benchmark for an index portfolio.

The index equity investable universe could broadly be viewed alongside three dimensions: market, size, and strategy, shown in Exhibit. As a first step in selecting an index, investors would need to decide in which of these three dimensions their benchmark should fit.

Market: investable markets are organised in three geographical groups (developed, emerging, frontier) and each group comprises a number of countries.

Decision points:

Developed or emerging, and if exposure to both is required, a combined all-world index or separate developed and emerging.Regional (e.g., Europe, APAC) or country (e.g., US, UK) indexes.If initial exposure would be required to one market/region, would exposure to other markets be required in the future: this would be a determining factor for index provider selection as different index providers classify some of the markets differently (e.g., Korea is classified as emerging by MSCI and as developed by FTSE Russell).

Size: investable markets are organised in three size segments (large cap, mid cap, small cap), with large and mid-cap typically combined in what is known as ‘standard index’.

Decision points:

Large and mid or small cap exposure, and if exposure to all there is required, a combined all-cap index or separate standard and small cap index.

Strategy: relates to the stock selection and/or stock weighting methodology of an index. Some of the key strategies include: market capitalisation weighted, risk premia factors, sustainable factors, thematic, diversified (e.g., equal weighted or a more complex approach to diversification). Other strategy indexes include: currency hedged, derivative (leverage, inverse, protected), and active strategies embedded in an index.

Exhibit 2: The investable equity index universe

After a decision regarding the relevant components of the investable universe is made, investors would typically consider a number of points related to the index construction, including:

Index delivering on its objective: this might sound obvious, but there are cases of indexes being marketed by the index providers with a particular objective, yet upon analysing the data it is evident that the index does not actually meet such objective. For example, if an index claims to be ‘low volatility’, analysis of the historical volatility of returns should provide an indication of how this compares to the volatility of the underlying market cap weighted index.

Simplicity and transparency: one of the attractions of index investing is that indexes are typically constructed via clear unambiguous rules. If the construction methodology for an index is obscure, this could leave room for interpretation of the rules, and could potentially impact the tracking accuracy of the index portfolio.

Rebalancing frequency and turnover: another attraction of index investing is lower cost compared to active management. Indexes with more frequent rebalancing and/or higher turnover would lead to higher transaction costs associated with the rebalancing trades.

Capacity and liquidity: market cap weighted indexes with large- and mid-cap developed markets equity exposure tend to be highly liquid with high capacity, while some non-market cap weighted indexes and/or indexes with emerging markets and small-cap equity exposure could have lower liquidity and lower capacity. This point is particularly relevant for larger mandates.

Breadth: this point relates to the market and size dimensions of the investable universe outlined above.

Risk models (proprietary vs. industry-wide adopted): more complex indexes involving optimisation/tilts are typically constructed using a risk model. Indexes constructed with an industry-wide adopted risk model (e.g., Barra, Axioma, etc.) allow their construction methodology to be analysed/tested more accurately by investors, while indexes constructed with proprietary risk models are more akin ‘black boxes’.

Back-tests vs. live track record: this point is particularly relevant for some of the more recently launched factor and sustainable indexes where the performance and other metrics presented by the index providers are based on back-tests rather than live data. In some cases, the back-tested data might have been overfitted, and the risk-return profile of the index after launch might differ from the back-tests.

Rules-based strategy or an index: this point relates mainly to non-market cap weighted indexes, including factor and sustainable, when clients might opt either for a third party factor and/or sustainable index, or select market cap weighted index and achieve the factor exposures via screens and/or tilt on the portfolios, i.e. via a rules-based strategy.

Index provider selection

The requirements for market, size, and strategy exposure of the benchmark noted in the above section would typically influence the selection of an index provider. Index providers tend to offer their indexes in two main groups, local and global, as outlined below.

Local indexes are the so-called ‘flagship’ indexes covering a specific geographic segment. Examples include: S&P 500, Dow Jones Industrial Average, Russell 3000, FTSE 100, EUROSTOXX 50, DAX, SPI, etc. These indexes could be viewed as ‘stand-alone’ as they are not constructed with a building block approach in the context of the global investable universe – i.e., these indexes are favoured by investors aiming to gain exposure to a specific geographic segment via the flagship/blue chip local indexes associated with that segment. For example, if an investor would like to gain exposure to the US large- and mid-cap equity market, and are not interested in gaining exposure to other markets/size segments, they would likely consider S&P 500.

Global indexes aim to capture the global investable equity universe via indexes constructed by a building block approach, allowing investors to gain exposure to one, more, or all market and size segments globally without gaps or overlaps. These are suitable for investors who either want to gain exposure to the global investable universe from the onset of launching their index equity portfolio (via a global index) or gradually via combining different market and size segments (building blocks). MSCI Global Investable Market Indexes (GIMI) and FTSE Global Equity Index Series (GEIS) are some of the most popular global index series. In Exhibit we outline the typical building block approach in constructing global indexes.

Exhibit 3: Global indexes constructed via building blocks

In addition to mainstream, long established index providers such as MSCI, FTSE Russell, S&P DJI, and STOXX, there are more niche, specialist index providers such as Scientific Beta and Research Affiliates, focusing on construction of factor indexes, as well as index disruptors such as Solactive, offering high degree of customisation.

In addition to deciding on local vs. global index provider, investors should also consider index governance and commercial aspects as part of their index provider selection.

Index governance

Index provider reputation and longevity: once a benchmark is selected and applied to an index equity portfolio, it is very disruptive to have to change it for another index, especially an index from another index provider. Such change might be triggered by the index provider going out of business or having to rationalise index series due to low investor interest making these index series financially not viable. A due diligence on the index providers, including review of their ownership structure, financial position, and business plan, could provide insights on their potential longevity.

Research, data availability, and support: established index providers employ large teams of researchers conducting analysis on a variety of topics, including market structure, corporate events, risk premia factors, sustainability, etc. Availability of such research and databases is particularly relevant in the construction of custom indexes. Additionally, timely and comprehensive support from the index providers in answering investor questions is important, especially when the questions concern treatment of corporate events in the index, as these could impact the tracking accuracy and the value of the index portfolio. Data and analytics are increasingly important in light of the growth in factor and sustainable indexes, with many index providers buying specialist database, especially in the field of sustainable data. While such databases allow index provider to offer more customisation, such customisation tends to be restricted to the toolkit of the index provider.

Proven governance history: as indexes are rules-based strategies, transparent, unambiguous and robust rules related to their construction methodology, calculation policy, corporate events treatment, and rebalancing, are key for the efficient implementation and management of an index portfolio.

Commercial

Asset-based index licence fee and index data cost: with the continuing strong growth in index investing, index providers are trying to capitalise on this trend by charging asset-based index licence fees for the right to track their indexes (typically these fees are basis point-based fees applied on AUM) as well as custom index data fees for constructing tailor-made indexes (typically these fees are annual fixed monetary amount fees applied per index). These fees are payable by investors in addition to the management fee, and for larger size index portfolios index fees could dominate the overall fee. Fees vary between index providers, and could also be negotiable, hence, it is worth obtaining indicative fee quotes from different index providers.

Competing indexes: related to the above point on index fees, availability of competing similar indexes constructed by different index providers could potentially allow investors to select the most cost effective index.

Client interest: client interest in an index is important from two aspects. First, the more popular an index is, the more resources, support and maintenance an index provider would typically allocate to that index, and it would also be less likely such index to be discontinued. Second, the more assets track an index via index portfolios, the more impact there would likely be on the price formation of the basket of additions to and deletions from the index around index rebalance, and the more micro inefficiencies could potentially be exploited allowing to add incremental value to an index portfolio.

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A Short Guide to Index Selection

Exhibit 1: Benchmark and index provider selection

Multi-step iterative process comprising quantitative and qualitative analysis

Benchmark selection

Exhibit 2: The investable equity index universe

Index provider selection

Exhibit 3: Global indexes constructed via building blocks

Index governance

Commercial

Risk Disclosure