Investor appetite leads to innovation:  New global index supports investing in ‘green’ economy

Investor appetite leads to innovation: New global index supports investing in ‘green’ economy

In a sign of changing investor appetites, FTSE Russell, the global index provider, has launched a new index that reduces exposure to fossil fuel companies while also systematically increasing exposure to companies with ‘green’ revenues. BNP Paribas (EPA:BNP) , the French multinational bank with global headquarters in Paris, has licensed the new index to create swaps and structured products. 

The FTSE Divest-Invest Developed 200 Index will gain exposure to companies engaged in the transition to a ‘green’ economy by using data captured by FTSE Russell’s new green revenue data model, called LCE, which is set to launch publicly in the next few months. 

The index is constructed from the largest 200 companies in the FTSE Developed All-Cap Index, all of which are eligible for inclusion, with a few notable exceptions, according to the London Stock Exchange Group Plc (LON:LSE) which owns FTSE Russell. They are the companies in the following industrial classification benchmark sectors – Oil & Gas Producers, Oil Equipment Services & Distribution Providers and Coal & General Mining. 

In their place will be green companies whose weights are based on their Low Carbon Economy Industrial indicator – or LOWCII factor, defined as a constituent’s ratio of its green revenues to its total revenues. 

The LCE model “is designed to capture changes in the revenue mix of companies as they increasingly provide goods, products and services that enable the world to adapt to, mitigate or remediate the impacts of climate change, resource depletion or environmental erosion,” said a statement from the Exchange. 

“We’ve seen a rapid expansion of the green businesses of many companies around the world. What’s been missing from measures of the ‘green transition’ is exposure to this growth side of the opportunity. FTSE Russell is delighted to launch this exciting and original product,” said Kevin Bourne, Managing Director, Database Services at FTSE Russell. 

Investor appetite is the driving force behind such innovation. “The agreement adopted at last November’s COP21 conference in Paris was recognized as a political success and it has helped to put climate risk at the top of the agenda for investors. At BNP Paribas, we have raised more than 3 billion euros ($3.4 billion) in sustainable equity solutions in the last three years including 750 million euros ($849 million) in the last quarter alone from investors looking to reduce the carbon risk in their portfolios,” said Neven Graillat, Global Head of Sustainable Investment Solutions, Global Markets, BNP Paribas. 

“For the first time, investors are being offered a way to assess companies based on their green revenues. Using data modeled by FTSE’s LCE, the index offers an innovative tool to help manage investors’ carbon risk while tilting towards companies engaged in the transition to a greener economy,” he added. 

Three of the largest constituents of the FTSE Divest-Invest Developed 200 Index with green revenues are Waste Management, Inc. (NYSE: WM), Tesla Motors (NASDAQ: TSLA), and Vestas Wind Systems (CPH:VWS). Further details around index methodology and a supporting factsheet can be found here. 

The LOWCII factors for each constituent are to be updated annually, preceding the September review of the FTSE Developed All-Cap index. 

“We see increasing appetite from our institutional investor client-base wishing to address climate change in their investment process. This index will enable us to bring to market products which satisfy the investment requirements of our U.K. institutional clients,” said Cian Fitzgerald, Head of U.K. Institutional Clients, Global Markets, BNP Paribas.

At an event earlier this month in New York to mark the 10th anniversary of the United Nations-supported Principles for Responsible Investment, Michael R. Bloomberg and Mary Schapiro, former Chair of the U.S. Securities and Exchange Commission, spoke on a panel about climate risk. Both are involved in the Task Force on Climate-Related Financial Disclosures. 

“Climate risk is the biggest risk facing the world today” said Mr. Bloomberg, with “transition risk” close behind.

Dina Medland is an independent writer, editor and commentator with a strong focus on issues around corporate governance, ethics, the workings of the boardroom and sustainable business. She is on the team of contributors to @ForbesEurope and is an ex-Financial Times staff member who has been a regular contributor in recent years. Further details about her background and a portfolio of work – including her commercially sponsored blog ‘Board Talk’ are available on her website


Originally published on April 29, 2016