A Carbon Index for Financial Markets?

EconomyWatch.com reader and Worldwatch Institute (worldwatch.org) publisher from Brazil, Eduardo Athayde, has sent us this thought provoking piece:

EconomyWatch.com reader and Worldwatch Institute (worldwatch.org) publisher from Brazil, Eduardo Athayde, has sent us this thought provoking piece:

EconomyWatch.com reader and Worldwatch Institute (worldwatch.org) publisher from Brazil, Eduardo Athayde, has sent us this thought provoking piece:

The World Federation of Exchanges reports that in 2008, more than $113 trillion in stocks, futures, and options was traded on its 51 publicly regulated exchanges. The 46,000 or so listed companies had a total market capitalization of more than $33 trillion. Meanwhile, the world derivatives market—including both over-the-counter and exchange-traded derivatives— has been estimated at some $791 trillion, 11 times the size of the world economy.
[br] Most of the world’s financial capital is traded with no carbon regulation, causing a “free flow” of carbon dioxide into the global economy. Shares, or units of ownership in a corporation, can propel or mitigate greenhouse gas emissions. Adoption of a Carbon Index for the stock market—and for financial markets as a whole—would broaden the transparency of the global finance system, disclose the carbon footprints of corporations and investors, and create a new platform for decarbonization in financial markets, aligning the financial industry with the low-carbon economy. A complementary DCarb Index could measure the level of decarbonization, shaping standards for low-carbon financial flows.

Positive signs of change are emerging in the exchange markets. The Dow Jones Sustainability Indexes, track the financial performance of leading sustainability-driven companies worldwide, providing objective benchmarks for managing sustainability portfolios. And in June 2009, NASDAQ OMX Group, Inc. and CRD Analytics introduced a Global Sustainability 50 Index that enables investors to track the top 50 companies in sustainability reporting—disclosing information such as their carbon footprints and workforce diversity. 

In March 2009, Standard & Poor’s introduced the S&P U.S. Carbon Efficient Index, a subset of companies listed on the S&P 500 that have a relatively low carbon footprint (calculated as annual emissions divided by revenue). According to Standard & Poor’s, the average annual carbon footprint of companies listed on the index through 2008 was 48 percent lower than that of the S&P 500.

[br] To provide guidance for low-carbon policy decisions, the U.S. Environmental Protection Agency (EPA) has proposed mandatory reporting of greenhouse gas emissions from large sources in the United States. Suppliers of fossil fuels or of industrial greenhouse gases, manufacturers of vehicles and engines, and facilities that release 25,000 tons or more per year of emissions would need to submit annual reports to the EPA. Compiled, this information would inform investors of both “high” and “low” carbon tendencies by company or sector, orienting large quantities of capital toward sustainability.

Expanded more widely, the use of Carbon Indexes could lead to greater protection of the economy’s natural support systems. For example, development of an Amazon STOXX Index, based on the Dow Jones STOXX Index, could help build investment knowledge for profitable eco-oriented businesses to conserve the world’s largest tropical forest. Brazil’s BM&FBOVESPA, the second largest exchange operator in the Americas by market value, has the opportunity to support these low-carbon businesses—attracting investors and promoting economically, socially, and environmentally integrated profits.

With such initiatives, the “low-carb” market, a symbol of the new eco-economy, can compete with high-carbon initiatives, stimulating greener investments. Because of its clout, the global financial market is one of the strongest and most flexible tools to build a low-carbon, sustainable economy.