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S&P launches carbon efficient index for emerging markets

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Standard & Poor’s has launched an index that measures the performance of investable emerging market companies whose weighting is based in part on their level of carbon emissions.

The S&P/IFCI Carbon Efficient Index is designed to closely track the parent S&P/IFCI LargeMidCap Index, Standard & Poor’s emerging markets benchmark.

The new index provides investors with 24 per cent less exposure to carbon emissions when compared with the parent index, the S&P/IFCI LargeMidCap Index.

At launch, the index covers 21 emerging markets, including Brazil, Russia, India and China, and more than 800 companies.

Standard & Poor’s and International Finance Corporation, a member of the World Bank Group, launched the new index at the UN Climate Change Conference in Copenhagen.

David Blitzer, head of Standard & Poor’s index committee, said: “Emerging markets are critical to tackling climate change and currently represent more than 11 per cent of the global equity market, as well as a rapidly growing share of carbon emissions. Institutional investors and plan sponsors increasingly want to factor carbon efficiency into their investment decisions, and S&P’s carbon efficient indices – a US index was launched earlier this year – provide powerful tools to enable them to reduce their carbon exposure without abandoning their investment strategy or experiencing below-market returns.

“In the past, simplistic screening approaches eliminated whole sectors or industries – such as airlines, utilities or oil companies – which created skewed portfolios. S&P’s approach maintains the balance between economic sectors and countries, while adjusting individual company weightings to reduce investor exposure to the carbon footprint. As a result, the index meets the dual goals of reducing carbon exposure while keeping the performance differential between the carbon efficient index and its parent index, known as the ‘tracking error,’ at moderate levels. Over the last three years, the tracking error has been less than 1.48 per cent.”

The index retains all the same constituents as the parent index, but with index weights adjusted by comparing companies within the same global sectors, using the carbon footprint as calculated by Trucost, the environmental data organisation. This is defined as the company’s annual greenhouse gas emissions assessment, expressed as tons of carbon dioxide equivalent, divided by annual revenues.

It follows the launch of the S&P US Carbon Efficient Index and thematic indices covering the global clean energy, water, alternative and nuclear energy sectors.

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