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Market Mechanism to Cut Emissions Goes Live with the Launch of ET Index Series

The Environmental Investment Organisation (EIO), a UK-based independent research body promoting eco-financial innovation, today put on show its newly developed Environmental Tracking (ET) Index Series in a bid to drive down corporate emissions and tackle climate change.

The ET Index Series can be described as a hybrid between traditional Socially Responsible Investment (SRI) indexes and mainstream passive index models, such as the UK FTSE 100. Unlike traditional SRI indexes, where only the ‘best in class’ are included, an ET Index includes every single constituent, just like a traditional market capitalisation index, but applies the environmental scoring method described below.

The ET Index Series follows on from the publication of the ET UK 100 and ET Europe 300 Carbon Rankings in April, which saw the largest companies in Europe ranked by emissions intensity and levels of transparency.

The Rankings were then open to challenge from any disgruntled company. Once the “Appeal Period” has passed, each company is re-weighted within the Index based on its position within the fully transparent ET Carbon Rankings, which now remain unchanged until next year’s Rankings are published.

The most radical feature of the ET Index Series is its ability to incentivise greater disclosure, verification, and, ultimately, emissions reduction amongst the world’s largest companies. Crucially, from an investor’s perspective, it is designed to do so without compromising in its ability to track its mainstream benchmark index.

It achieves this objective by shifting the demand for company shares via its re-weight system: supporting the share prices of those companies with the lowest GHG emissions intensities and greatest levels of transparency, while penalising those with the highest emissions and lowest levels of disclosure, on a systematic basis. Thus, creating a financial incentive to speed up the transition to a low carbon economy.

The EIO believes this marks the first time investors are being presented with a simple market-mechanism capable of applying pressure to the world’s largest companies to cut their emissions. The EIO highlights the ability of the concept to transgress international borders and  simultaneously by-pass the deadlock in international governmental climate negotiations.

Sam Gill, Operational Director at the EIO, explained, “The EIO is ultimately trying to bridge the gap between investment industry pledges on climate change and taking concrete action.”

Valter Serrentino, Head of CSR at Intesa Sanpaolo Group, one of the largest financial groups in Europe, offered his support, “I am very pleased to encourage this valuable initiative and I believe that making this practical tool available to investors can foster better transparency, more meaningful and consistent carbon accounting and a more thorough discussion of mitigation strategies.”

Sam Gill added, “The logic behind the Environmental Tracking re-weight system is that it applies the most pressure to the most carbon intensive industries and the least pressure to the least carbon intensive industries. After-all, the high intensities companies/sectors are the ones that are going to need to have the most pressure applied to them in order to encourage a shift to a low carbon model. The Ranking provides a basis for the re-weighting system, and at the same time draws attention to the current inconsistent nature of emissions reporting.”

There are numerous initiatives calling for the integration of environmental issues into mainstream investment practices, such as the UN Global Compact, the UN Principles for Responsible Investment, the Climate Principles and the Carbon Disclosure Project- the last of which claims to represent the interests of investors with assets of $64 trillion. This would suggest that there is definitely an appetite in the market for a platform from which to translate these pledges into a concrete market-mechanism, one which can truly harness the power of the financial system to address the most pressing of environmental issues: climate change.

Indeed, according to a 2010 Eurosif survey, the European SRI market holds about €5trn in assets under management, up 87% from 2007 when it was around €2.7trn. The EIO argues that this figure has the possibility of continuing to grow dramatically, as more and more institutions begin to integrate Environmental, Social and Governance (ESG) issues into their mainstream product offerings.

The EIO hopes that its Environmental Tracking indexes will equip it to become a pioneer in this field.

Valter Serrentino of Intesa Sanpaolo concluded, “This is the kind of innovative project that will help us tackle the challenge that lies ahead. Carbon risk management will have to come high up the list of priorities for businesses. At the same time, the opportunities are real for those who help affect a shift towards a low-carbon economy.”.

Emily Farnworth, Global Alliance Director at the Climate Group said of the EIO’s innovation, “It’s extremely helpful to see new products like this emerging. It encourages companies to measure, report and reduce carbon emissions. And, in this particular case, it also provides mainstream investors with a new tool to support the transition towards a low carbon economy.”

Sunday Times Press Release 5th June 2011