FTSE Russell, a leading global index provider, has announced the launch of the FTSE Russell All-World ex Coal Index Series, a new suite of indices tracking the performance of various broad equity market exposures while excluding firms operating in the coal mining industry and general miners with proved and probable coal reserves.
The index is designed for use in the creation of index-tracking funds, such as exchange-traded funds (ETFs) and as a performance benchmark.
The indices help investors manage carbon exposure in their investments and reduce write-off or downward revaluation risks associated with so-called “stranded assets”.
Stranded assets are fossil fuels deposits, including oil, gas and coal, that must remain unburned or in the ground in order for the world to avoid the worst impacts of climate change.
The idea is closely linked to that of the “carbon bubble”, the over-valuation of fossil-fuel-based energy production companies as the current valuation methodology considers fuel assets that may not be sold due to increased regulation, or does not account for the large social costs to the firm of increased global warming.
The methodology behind the indices is based on the exclusion of companies whose principal business activity is either coal mining or general mining as identified by the Industry Classification Benchmark (ICB). In addition, revenues must arise from various forms of coal mining as stated by the Standard Industrial Classification (SIC) System or based on the company’s most recent published annual report and accounts. This exclusion methodology is designed to be transparent, easy to understand, quantifiable and repeatable across FTSE’s Global Equity Index Series (FTSE GEIS), which covers approximately 7,400 companies that represent almost 98% of global market capitalisation.
The suite currently comprised three indices: the FTSE All-World ex Coal Index, the FTSE Developed ex Coal Index and the FTSE Emerging ex Coal Index. Based on back-tested data, each of the indices has produced superior risk/reward ratios (before fees, trading costs and expenses) since June 2010 relative to their parent index.
Specifically, the FTSE All-World ex Coal Index produced a risk/reward ratio of 1.05 compared to a ratio of 1.09 for the FTSE All-World Index; similarly, the FTSE Developed ex Coal Index produced a ratio of 0.96 compared to 0.99 for the FTSE Developed Index; and 3.71 for the FTSE Emerging ex Coal Index versus 4.19 for the FTSE Emerging Index. Each index also recorded slightly superior maximum drawdowns recorded each year, indicating value at risk measures may be favourable in the newly constructed indices.
The FTSE All-World ex Coal Index has current country weightings geared towards the US (50.9%), followed by Japan (8.9%), the UK (6.9%), France (3.2%) and Switzerland (3.2%). The fund has sector exposure that is currently weighted towards healthcare (11.3%), banks (11.2%), industrial goods and services (11.0%), technology (10.8%) and oil and gas (7.3%). The fund is well diversified with 2,999 holdings of which the top 10 contribute 8.2% to portfolio size. Some of these top holdings include Apple (1.9%), Exxon Mobil (0.9%), Microsoft (0.8%), Wells Fargo (0.8%) and Johnson & Johnson (0.7%).
This indices, which fall within FTSE’s growing Socially Responsible Investing (SRI) family, complement existing index suites such as the closely linked FTSE All-World ex Fossil Fuels Index Series, which omits companies with revenue or reserve exposure to all fossil fuels, the FTSE Environmental Opportunities Index Series, which tracks firms actively engaged in environmental businesses such as energy efficiency, waste management, pollution control and water infrastructure, and the FTSE4Good Series, a globally representative set of indices that exclude firms dealing in tobacco, firearms, pornography and other such “vice” industries.
Whilst the new indices will undoubtedly be on the radar of ETFs issuers, it could be some time before an ETF is available. Investors seeking immediate access to such a strategy could consider the NYSE Arca-listed SPDR MSCI ACWI Low Carbon Target ETF (LOWC). This ETF tracks the performance of the MSCI ACWI Low Carbon Target Index which aims to provide a return similar to a broad market index (in this case, the parent index is the MSCI ACWI), while also minimizing carbon exposure. It does this by excluding firms which have a high proportion of carbon emissions (as measured by actual emissions plus potential emissions, i.e. fossil fuel reserves) relative to sales and per dollar of market cap. The fund has a TER of 0.20% and $94m in AUM.
In terms of UK and European listings, ETF investors would need to adopt the SRI theme more broadly. Possible funds include the iShares Dow Jones Global Sustainability Screened UCITS ETF (IGSG LN) which tracks the Dow Jones Sustainability World Enlarged Index ex Alcohol, Tobacco, Gambling, Armaments & Firearms and Adult Entertainment Index investing according to a long-term environmental, social and corporate governance (ESG) framework. The fund has a TER of 0.60% and $152m in AUM.
UBS also offer a suite of SRI-based ETFs offering a range of regional and country exposures linked to the MSCI Global Socially Responsible (SRI) Index. Constituent selection is based on research provided by MSCI ESG Research which provides research, ratings and analysis of environmental, social and governance-related business practice.