Research Insights Carbon Efficient Investing in Emerging Markets as aTool to Combat Global Warming
However, it is an inescapable fact that fiduciary responsibility to achieve market returnsdictates the flow of a large amount of institutional money. Niche investment strategiesthat cater to an audience of socially responsible investors haven’t crossed over into themainstream market, as the relatively smaller size and liquidity of the ‘clean’ companieshampers huge investments. What is required, in our view, is a broad market strategy thatcan meet the dual objectives of replicating a broad market and, at the same time,rewarding carbon efficiency. Pension funds, sovereign funds, and other governmentbodies with large assets can make a difference if they support an agenda that promotescarbon efficiency, and yet allows them to satisfy their fiduciary responsibilities at thesame time.
S&P/IFCI Carbon Efficient Index Replicates the Risk Return Profile of the S&P/IFCI LargeMidCap
On the heels of the launch of the S&P U.S. Carbon Efficient Index in March 2009,Standard & Poor’s, under sponsorship of the International Finance Corp. (IFC), theprivate sector arm of the World Bank Group, began work in the area of emergingmarkets. The idea was to replicate the risk return profile of the S&P/IFCI LargeMidCapfor emerging markets, but with an emphasis on carbon emissions. The resultingS&P/IFCI Carbon Efficient Index, which will launch on December 10, 2009 inCopenhagen, Denmark, closely tracks the investment performance of the parent indexwhile the index constituents provide a 24% reduced exposure to carbon emissions.
There are Challenges in Working with Emerging Markets' CarbonFootprint Data
The S&P/IFCI Carbon Efficient Index, like its parent, includes 21 emerging markets andmore than 800 stocks. Market weights within the index range from approximately 20%for countries like China and Brazil to less than 1% for Hungary and the Philippines.Frequently, smaller markets lack sectoral diversity, and a limited number of companiescontribute nearly 100% of their emissions. Carbon footprints
, as calculated by Trucost, acompany that provides comprehensive data on corporate environmental impacts, arenaturally highest for companies in the utilities, energy, and materials sectors. A simpleexclusion of these companies from an index provides a vast sector bias toward investingin financials and technology companies, an approach unacceptable to most investors.Carbon footprints differ greatly between emerging markets, and between sectors withinthe same emerging market (see table on page 4). This exponentially increases thecomplexity of designing an emerging market carbon efficiency index.
Trucost has partnered with Standard & Poor’s to provide data on carbon efficiency. Trucost calculatestotal greenhouse gas emissions of each company in the index based on company’s resource usage,emissions, and supply chain. It then divides total emissions by total revenue dollars earned to get anormalized, comparable carbon footprint