Global Compact International Yearbook 2017

Another aspect of the basic nuts and bolts of the market that
hindered carbon-aware finance for some years was the absence
of relevant stock market indices. Standard stock indices such
as the FTSE 100, Dow Jones Industrial Average, or CAC-40 are
overweight in fossil fuels and internal combustion autos, but
underweight in renewable energy and clean tech. Funds that
adopted “clean” policies early on struggled with a market that
could only assess their performance compared to the existing
benchmarks. Some funds, such as the Dutch pension fund
PGGM, were forced to create their own indices; PGGM launched
its ESG Index in 2013.
Over the past few years, a number of new indices have been
developed. As with sustainable investment, there are different
approaches to sustainable indices: Some simply try to exclude
fossil fuel and other high-carbon stocks; others use a carbon
weighting to adjust market capitalizations; some focus entirely
on cleantech. Investment-based firms MSCI and STOXX both
offer a family of differently weighted low-carbon indices, allowing
investors to choose which model of investment they
prefer to use.
Although most indices are based on historic data, STOXX
bases its Low Carbon – Climate Impact indices on the Carbon
Disclosure Project’s scoring methodology, which takes forwardlooking
data into account. This rewards companies with ambitious
carbon-reduction plans and could ultimately prove an
incentive for companies to reduce their carbon footprints. The
Cleantech Index, on the other hand, was designed to index the
highest-quality companies in a number of sectors, including
renewables, water treatment, agriculture, and transportation,
and has now been joined by others, including the NASDAQ
Clean Edge Green Energy Index.
However, the ambiguity of disclosure standards makes calculating
such indices difficult. MSCI estimates the carbon exposure
of companies that do not report sustainability criteria by simply
using the average emissions per dollar market capitalization for
their sector – that could be inaccurate, and perhaps does not
penalize companies enough for non-disclosure. At the same time,
the methodology behind some indices has conflicting results
– ExxonMobil has a higher weighting in the MSCI Low Carbon
Leaders than it does in the “unadjusted” MSCI World Index.
Still, as more funds come to use the adjusted benchmarks,
carbon-aware investing is likely to become more common – and
much easier to assess in terms of performance. There is another
bonus to low-carbon indices, though, which is that they make
the creation of Exchange Traded Funds possible.
Low-carbon Exchange Traded Funds provide a way for retail
investors to invest at low cost in a “clean” portfolio, but they
also give institutional investors an easy way to build a carbonaware
component into a conventionally structured portfolio.
That might ease the first step into “greening” an entire fund, or
simply allow a manager focused mainly on the top 200 stocks
to add a clean tech segment.
The latest actor is Climetrics – the world’s first climate rating
for funds. Symbolized by green leaves “issued” on a scale of
one to five, it will enable investors to gauge and compare the
climate impact of investments in funds and potentially encourage
growth in climate-responsible fund products. The equity
fund market – worth more than €3 trillion in Europe – could
be a significant lever for mitigating climate change. However,
despite fast-growing institutional and customer demand for
climate-conscious investing, to date, no ratings system has
allowed investors to compare funds’ climate-related impacts.
Climetrics bridges this gap, uniquely rating each fund on the
climate change impact of its portfolio holdings, as well as on
the asset manager’s own application of climate impact as an
investment and governance factor.
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Global Compact International Yearbook 2017