Investors are becoming warier of the valuation risk in their portfolios as a result of climate change. This week, there are three new indices and a new free web tool to help them navigate their way to fossil fuel-free investments.
Three new climate change index series derived from the constituents of the S&P Global 1200 were announced this week by financial market indices giant S&P Dow Jones Indices (S&P DJI). Each index series is designed to measure the performance of S&P Global 1200 companies, and weight investments or exclude companies, based on emissions levels and fossil fuel reserves.
“Many investors are trying to facilitate the transition to a low carbon economy by financing projects in the renewable energy sector, avoiding high-carbon producing companies or minimizing their exposure to fossil fuel companies,” said Julia Kochetygova, Head of Sustainability Indices at S&P Dow Jones Indices.
“The three new S&P DJI index series are designed to provide alternative performance narratives to standard benchmarks, being comprised of those companies meeting the strict fossil fuel and carbon efficient standards set within each index series.”
The S&P Global 1200 Carbon Efficient Index Series over-weights constituents that have lower levels of annual greenhouse gas (GHG) emissions and under-weights those with higher levels, in their respective Global Industry Classification Standard (GICS) sectors.
The S&P Global 1200 Carbon Efficient Select Index Series excludes companies that have the largest relative annual GHG emissions rather than reweighting the constituents.
Trucost Plc calculated the annual GHG emissions for the Carbon Efficient and Select Index Series. The company’s Head of Environmental Finance, Neil McIndoe, said, “Taking account of companies’ operational and often more significant supply chain’s carbon exposure ensures a robust approach to risk reduction. We are delighted to continue our long-standing collaboration with S&P Dow Jones Indices by providing the data to create new indices which offer investors significantly lower carbon exposure and benchmark financial performance.”
The S&P Global 1200 Fossil Fuel Free Index Series excludes companies which own fossil fuel reserves or have “any use of fossil fuels, including third party and in-house power generation.” However, the exclusion “does not cover companies which are exclusively engaged in the extraction of metallurgical or coking coal,” — it only applies to thermal coal. RobecoSAM, which collaborates with S&P Dow Jones to compile the Dow Jones Sustainability Indices, was trusted with researching fossil fuel reserves ownership to inform the index.
Meanwhile, on Tuesday shareholder advocacy nonprofit As You Sow unveiled FossilFreeFunds.org, an online, free-to-the-public tool with information on the 1,500 most-held mutual funds. Investors are able to easily compare mutual funds’ holdings in fossil fuel industries, related service companies, and fossil-fired utilities.
The tool was created to provide information to those who want to know what they own and can help them divest to various levels. As You Sow says Fossil Free Funds empowers people to learn where their money is invested, avoid the financial risk of a weak oil industry, align their investments with their values, and avoid supporting companies fueling climate change.
"Since the beginning of the divestment movement, investors have been clamoring for transparency and a way to identify how they can use their portfolios to actively combat climate change,"said Andrew Behar, As You Sow's CEO. "We developed FossilFreeFunds.org after we realized that our own 401(k) was composed of mutual funds that had major oil, gas, and coal extraction companies - but we had no idea. We figured that if we didn't know, then probably no one did."
The website’s search bar quickly calls up the information on a fund, and displays fossil fuel investment information through five segments. If a fund is fossil free in a segment, it earns a green badge. The segments focus on coal companies, oil and gas companies, and fossil-fired utilities.
A graph displays the percentage of the funds’ assets which are “flagged” as companies included in the segment list, and a table displays the number of holdings and corresponding percentages for each segment. Morningstar provided fund holding data for the tool.
"With comprehensive fund holdings data, we are able to provide greater transparency and help investors better evaluate the sustainable and ethical effect of their investments,” said Joanna McGinley, Head of Global Alliances and Redistributor Solutions for Morningstar.
The minimum requirement of the Divest-Invest pledge is met with a badge for the “Carbon Underground 200,” which compares holdings against the 100 largest coal and 100 largest oil and gas companies as measured by proven reserves. Unfortunately, none of the funds in the five major fund families, including Fidelity, Vanguard, and TIAA-CREF, offer socially responsible diversified mutual funds free of the Carbon Underground 200. These groups control record-keeping at 75 percent of all employer-sponsored retirement plans — valued at $5.6 trillion for 91 million Americans.
Out of the 1,500 most-held funds, only 12 diversified and SRI funds have earned the maximum five badge rating.
Fossil Free Funds also plans to release a downloadable toolkit to help individuals discuss fossil-free options with colleagues and plan administrators, and encourage their workplace to divest.