A new index, that’s goes live today, joins the ranks of the dozen or so green indexes – the Environmental Tracking (ET) Index Series.
Its purpose is to goad corporations into reducing emissions and tackling climate change. When supported by a sufficiently large pool of investors, it will influence company share price in relation to emissions.
Here’s how it works:
The index ranks the largest companies based on their emissions intensity and levels of transparency. Companies then have an opportunity to challenge that ranking during an "appeals" period.
Once the "Appeals Period" passes, each company is re-weighted in the Index, based on its final grades on emissions and transparency. The final rank remains in force until the following year, when the process begins again.
In this way, the ET Index Series incentivizes greater disclosure, verification, and, ultimately, emissions reduction among the world’s largest companies.
Crucially, from an investor’s perspective, it’s designed to do so while also tracking its mainstream benchmark index.
It achieves this objective by shifting the demand for company shares via its re-weight system: supporting the share prices of those companies with the lowest GHG emissions intensities and greatest levels of transparency, while penalizing those with the highest emissions and lowest levels of disclosure, on a systematic basis. Thus, it creates a financial incentive to speed up the transition to a low carbon economy.
The Environmental Investment Organisation (EIO), a UK-based independent research body promoting eco-financial innovation, created the index.
The Index Series is a hybrid between traditional Socially Responsible Investment (SRI) indexes and mainstream passive index models, such as the UK FTSE 100.
Unlike traditional SRI indexes, where only ‘best in class’ companies are included, this Index includes every single constituent.
In April, two versions in the series were released: the Environmental Tracking UK 100 and Environmental Tracking Europe 300 Carbon Rankings.
The EIO highlights the ability of the concept to cross international borders and simultaneously by-pass the deadlock in international governmental climate negotiations. “The EIO is ultimately trying to bridge the gap between investment industry pledges on climate change and taking concrete action,” says Sam Gill, Operational Director at the EIO.
"I am very pleased to encourage this valuable initiative and I believe that making this practical tool available to investors can foster better transparency, more meaningful and consistent carbon accounting and a more thorough discussion of mitigation strategies," says Valter Serrentino, Head of CSR at Intesa Sanpaolo Group, one of the largest financial groups in Europe.
“The logic behind the Environmental Tracking re-weight system is that it applies the most pressure to the most carbon intensive industries and the least pressure to the least carbon intensive industries," Sam Gill added. "After-all, the high intensities companies/sectors are the ones that are going to need to have the most pressure applied to them in order to encourage a shift to a low carbon model. The Ranking provides a basis for the re-weighting system, and at the same time draws attention to the current inconsistent nature of emissions reporting.”
Numerous initiatives are calling for integration of environmental issues into mainstream investment practices, such as the UN Global Compact, the UN Principles for Responsible Investment, the Climate Principles and the Carbon Disclosure Project – the last of which claims to represent the interests of investors with assets of $64 trillion.
This suggests there is an appetite in the market for a platform from which to translate these pledges into a concrete market mechanism, one which can truly harness the power of the financial system to address the most pressing environmental issue: climate change.
Indeed, according to a 2010 Eurosif survey, the European SRI market holds about EUR 5 trillion in assets under management, up 87% from 2007 when it was around EUR 2.7 trillion.
The EIO argues these investments could grow dramatically, as more institutions integrate Environmental, Social and Governance (ESG) issues into their mainstream product offerings.
"It’s extremely helpful to see new products like this emerging. It encourages companies to measure, report and reduce carbon emissions. And, in this particular case, it also provides mainstream investors with a new tool to support the transition towards a low carbon economy,” says Emily Farnworth, Global Alliance Director at the Climate Group.
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