Climate change isn’t just a matter for environmentalists—investors are getting involved as well. Many groups such as MSCI, BlackRock, and State Street Global Advisors are putting together “low carbon indexes”—recommended investments based on companies that have reduced their carbon emissions to make their work more viable and to encourage investors to move away from “dirty” fuel-based companies.
MSCI (formerly Riskmetrics, with a board including Rene Kern) has put together what it calls the MSCI Global Law Carbon Leaders indexes, which appeal specifically to investor concerns about carbon emissions. The idea is to help investors avoid “carbon stranded assets,” or investments that could lose economic value due to changing laws regarding carbon emissions and greener technology.
Mats Andersson, CEO of the Fourth Swedish National Pension Fund, has noted that climate change is an increasingly important consideration for investors. Rather than entirely divesting fossil fuel holdings, his fund, like many others, is instead focusing on low-carbon equity indexes. And it’s not merely a move inspired by environmentalism: over a year, Andersson found that low-carbon funds actually outperformed other indexes by 100 basis points. Furthermore, a low-carbon index allows investors to focus not only on cleaner energy companies, but other investments in companies that value lowering their carbon footprint, such as retail and banking.
“One reason for the outperformance could be that companies that look after their carbon footprint seriously will probably look after the rest of their business in the same serious way,” said Andersson.
“I see no reason long term why we shouldn’t measure the carbon footprint of every investment we do,” he concluded.
The real investment (not to mention environmental) breakthrough, however, will likely need to be not only low carbon indexes, but also a move to invest in greener technology. “Threats such as climate change require action, not just reaction,” said Matthew Fitzmaurice, chief executive at EcoAlpha. “Investors looking to move the needle on carbon are realizing that to maximize impact, they must direct the power of their capital not just away from fossil fuels, but also towards the solutions.”