Global Warming Issue Spawns FTSE Indexes

April 29, 2014

The four market-capitalization-weighted indexes derive from the FTSE Global Equity Index Series, comprising more than 7,000 securities, and represent 98 percent of the world’s investable market cap. The broadest of the four benchmarks—the FTSE Developed ex Fossil Fuels index—will exclude about 75 companies from the universe, which, combined, represent anywhere from 8 to 12 percent of the total market cap.

By design, each of the indexes will exclude companies based on three criteria:

  1. Classified as in the ICB subsectors – exploration & production, integrated oil & gas, coal mining and general mining; and either have:
  2. Revenues arising from coal mining, crude petroleum, natural gas exploration and production; or
  3. Proved and probable (2P) reserves in coal, oil or gas based on the company’s published annual report and accounts.

While the strategies exclude major producers and explorers, they do not exclude major consumers of oil and carbon-based fossil fuels such as transportation companies, utilities and even banks that are funding these producers.

The decision to include downstream users speaks to the challenges of confining the exclusion criteria, which, in the end, centered on companies that own oil and gas and coal reserves, and get revenues from that, per NRDC’s mandate.

“There’s a very clear line on those who own fossil fuel reserves, and whose business depends on digging those up and having them consumed, releasing carbon into the atmosphere,” Peter Lehner, executive director of NRDC, told ETF.com.

“On the other hand, there are companies that use fossil fuels, like electricity generating companies, but some of which rely on other sources of energy like solar, and some of which are heavily depending on fossil fuels,” he said. “There’s no clear line on the consumers side, and moreover, that line can change year to year.”

According to Lehner, expanding the exclusion criteria to companies that use fossil fuels, and those that work on areas such as drilling, would “diffuse” the message.

NRDC is a nonprofit organization with 1.4 million members that sets out to protect the world’s natural resources, public health and environment.

While the set of indexes focuses on developed equities, FTSE said they could easily expand the family of benchmarks to tap into emerging markets as well.

 

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