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The not-for-profit Environmental Investment Organisation (EIO) is to launch a carbon ranking of the world's largest companies with the aim of helping fund managers build carbon emissions into their investment decisions.

The Environmental Tracking (ET) Carbon Rankings Index could be signed up as a live investment index by Standard & Poors if fund managers indicate their backing for the initiative.

Indexes – of which the FTSE100 is probably the best known in the UK – rank companies so as to enable fund managers to invest in proportion to the companies' position in the ranking. For example, FTSE100 companies are ranked by size of market capitalisation.

The Carbon Rankings Index similarly ranks companies by market capitalisation, but adds a weighting based on their emission reduction performance.

Ranking companies in this way encourages fund managers to invest in proportion to the companies' efforts to reduce emissions as well as their market capitalisation, the EIO said. In theory, the greater a company's effort to reduce emissions, the higher it appears in the index and therefore the greater the demand for its shares, driving up share price and rewarding the company for its initial efforts.

Conventional Socially Responsible Investment (SRI) funds tend to favour specific companies and exclude others based on varying ethical criteria. But Michael Gill, strategic director of the EIO, said the ET Carbon Index would mark the first time emissions metrics apply a uniform pressure on the share prices of all large companies.

So far EIO has built Indexes for the Global 1000, Global 800 and European, North American, Asia-Pacific and BRIC (Brazil, Russia, India and China) regions.

Each index uses publicly available emission data from companies' own reports and the Carbon Disclosure Project to rank all companies with over $3bn (£1.9bn) market capitalisation. The indexes are further weighted towards companies that h ave made available externally verified emissions data under all three scopes of the GHG Protocol covering direct and indirect emissions.

Companies which fail to declare emissions are given "inferred" scores based on a "worst-case" benchmark company in their index.

"Companies with inferred numbers can move up the index by making their data available to disprove our inferred figures," Gill told BusinessGreen.com.

Using the ET Carbon Ranking Index, the top three Global 1000 companies are Natura Cosmeticos of Brazil, Novozymes of Denmark and AstraZeneca of the UK. The bottom three are Petrobras of Brazil, Berkshire Hathaway, Warren Buffet's US investment house, and Industrial and Commercial Bank of China.

The next step for EIO is to promote the index among fund managers, Gill said.

"Signing a contract with S&P will cost real money and we will need the fees from the use of the index [by fund managers] to sustain that," he explained. "But [our fees] will be a quarter of that charged by other indexes."

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Previously in the news...

INVESTMENT ADVISOR

GREEN IDEA GETS WARM RECEPTION

THE concept of green tracker funds received a positive response from the City at a conference at the London School of Economics (LSE) earlier this month.

Green trackers would follow the FTSE 100, evaluate the environmental friendliness of companies in the index and attempt to use their shareholdings to change environmentally damaging corporate policies. They would also exploit the popularity of tracker funds.

Michael Gill, chairman of the Environmental Initiatives Network, a division of the LSE, originated the concept. He said the most surprising aspect of the conference was that people with as diverse backgrounds as Bernard Asher, formerly chairman of HSBC Investment Bank, and Tony Juniper, policy and campaigns director of Friends of the Earth, were able to agree on the value of green trackers.

Mr Gill said "Nobody made a substantive objection to the concept as an idea and its commercial viability wasn't really at issue at all."

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FINANCIAL NEWS, JULIETTE PEARSE

ASHER BACKS NEW RANKING

Bernard Asher, former chairman of James Capel, is lending his support to a new global environmental index tracking concept.

The Environmental Investment Organisation's (EIO) approach will rank all companies in an existing index according to a detailed environmental scoring process. The concept has been designed to operate in any stock market in the world, but is likely to start with the FTSE 100.

In this respect it is unlike most existing ethical, green or "socially responsible" investment practices, which create a separate index that excludes companies with poor environmental performance. NPI, for example, launched the first ever social tracking product at the end of last year, which has selected 150 socially responsible UK stocks.

Asher, who will be among a host of financial and ethical speakers at a London School of Economics conference at the weekend, said: "We need some sensible ground rules for ethical investment. I am hoping that this is a practical way of making companies realise that people have concerns about companies disturbing the environment and that they could do better."

An independent Environmental Scoring Panel will adjust the weighting of companies in existing indices according to their score in the new green and ethical ranking.

Michael Gill, chairman of the EIO, aims to build on the popularity of passive investment, which has already attracted a critical mass of institutional and retail investors.

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INVESTMENT ADVISOR

GREEN TRACKER FUNDS MOOTED TO INFLUENCE CORPORATE POLICY

THE LONDON School of Economics has proposed the introduction of green tracker funds with environmentally sound objectives to force companies to adopt green policies through mass investment.

The Environmental Initiatives Network, a division of the LSE, said a fund with the mass appeal of a tracker and environmentally friendly objectives would introduce green investing to a much wider section of the retail and institutional markets.

It said such funds would allow the green trackers to achieve more influential levels of shareholding and so change environmentally damaging corporate policy.

According to the network's proposals, UK green trackers would follow the FTSE 100 and an Environmental Scoring Panel would rank companies in the index according to an environmental scoring process yet to be finalised.

Michael Gill, founder and chairman of the network, said the concept of “environmental tracking” had been in its current form for the last four years.

"We are in the process of establishing the credibility of this approach to investing," he said.

The idea of environmental tracking was discussed last week at a one day conference at the LSE. Speakers included Tony Juniper, policy and campaigns director of Friends of the Earth, Bernard Asher, formerly chairman of HSBC Investment Bank and Dr Jeremy Leggett, chairman of Solar Century.

Video

Clip from the launch courtesy of Edie.net