FTSE Russell, the index and data provider owned by the London Stock Exchange Group, said institutions are already looking to change allocations based on its new model which aims to measure the global transition to a green economy.
Last month FTSE Russell launched its Low Carbon Economy model, which measures the green revenues of 13,865 public companies, representing 98.5% of total global market capitalization. Traditional ESG measures have focussed on the operation of a company, using information from non-audited sustainability reports, or have focussed on excluding hydrocarbon producers or heavy carbon dioxide emitters from portfolios.
FTSE Russell has developed a new green industry classification for listed companies made up of 8 sectors and 60 new subsectors based on audited reported revenues from goods, products and services that help the world to adapt to, mitigate or remediate the impact of climate change, resource depletion or environmental erosion. The model then calculates a score for each company – the low carbon industrial indicator (LOWCII) factor – which is the ratio of green revenues to total revenues based on the audited financial disclosures can ranges from 0% to 100%.
Kevin Bourne, managing direct of database services at FTSE Russell, said at a briefing today that 170 institutions have been testing the data model for 12 months. Bourne added: “One of the largest pension schemes in the world has been using the data for a year and is looking to shift 25% of its equity allocation to green revenues.”
Bourne said analysis of the FTSE Global Equity Index Series showed that 7.2% of the index value comes from green revenues, almost as much as the 8.3% from emerging markets. Of the 7,711 companies in FTSE GEIS nearly a quarter, or more than 1,880, have some green revenues and this has been increasing since 2008.
Mark Makepeace, chief executive of FTSE Russell, said in a statement: “We calculate that the green opportunity is equitable in size to emerging markets and the launch of our green revenue data model, and related indexes, provides the missing piece for investors, with a framework that captures the full picture of their green revenue exposure for the first time.”
Christiana Figueres, executive secretary of UN Framework Convention on Climate Change said in a statement: “The long term success of the Paris climate agreement will hinge on the greening of trillions of dollars of investment over the coming years and decades. Initiatives like this can, if widely used, play a real role in assisting asset managers and owners to accelerate the necessary transition to a green economy.”
Clients including governments, portfolio managers, research analysts and product managers pay a subscription to gain access to the full dataset so they can make investment decisions, track changes in the green economy or launch new products.
FTSE Russell has developed 10 Green Revenues Indexes based on the LCE data model which also provide the basis for a series of exchange-traded products. In April BNP Paribas Corporate and Institutional Banking licensed the new FTSE Divest-Invest Developed 200 Index, which aims to cut exposure to companies with fossil fuel exposure and increase exposure to companies engaged in the transition to a green economy. The French bank plans to issue Delta One, swaps and structured products linked to the index later this year.
Neven Graillat, global head of sustainable investment solutions, global markets at BNP Paribas, said in statement: “At BNP Paribas, we have raised more than €3bn in sustainable equity solutions in the last three years including €750m in the last quarter alone from investors looking to reduce the carbon risk in their portfolios.”
At he beginning of this year France enacted domestic legislation, Article 173, on new green portfolio disclosure requirements for asset managers and asset owners that have to be put in place at fund level by the end of next year, or firms have to explain why the data is not being shown. The three new measures relate to ESG, covering how companies operate, their greenhouse gas emissions and whether the companies contribute to the low carbon economy.
Similar disclosure requirements are also being considered by the European Union and Switzerland according to Bourne.
“I was in Boston recently and one asset manager said they had already been approached by a client in France to provide this information,” added Bourne. “The legislation is already having ramifications.”
As well as having ramifications for US fund managers, China is looking to mobilise private investment for the move to a greener economy.
Last month Esther Blythe, British Deputy Consul General to Hong Kong and Macao, spoke at the LSEG Greater China Forum on the Bank of England and the People’s Bank of China are co-chairing the G20 Green Finance Study Group.
“This work is crucial not only in accelerating the development of an important new market but also in helping to support China’s transition to a low carbon economy; and will hopefully serve as useful case study for other developing economies who are also taking more of an interest in the green agenda,” added Blythe.
She continued that Chinese green bond issuance is expected to reach RMB 300bn ($45bn) this year.
“The City of London has earmarked 2016 as the Year of Green Finance and intends to make London the world leader in this area,” Blythe added. “We will see more low carbon policy announcements between UK and China this year as we all play our part in the global effort to prevent dangerous climate change.”
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