Standard & Poors Offers Carbon Performance Index: Focus On Small Footprint Brigade
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No 'Black Chippers' were included in the newly offered S&P; U.S. Carbon Efficient Index (a pdf file). Good thing, because S&Ps; decision to use a positive investment screen avoided all-out climate war with the high-carbon business elite. See below for details.
From the S&P; press release:
To reflect its carbon efficiency, the Index is comprised of constituents of the S&P; 500 that have a relatively low Carbon Footprint, as calculated by Trucost Plc. Trucost, the environmental data organization quantifies the environmental impact of over 4,500 companies across different sectors and geographies. Trucost calculates the carbon intensity of companies in the S&P; U.S. Carbon Efficient Index by researching and standardizing publicly disclosed information and engaging directly with companies to verify its calculations on an annual basis. Carbon Footprint is calculated as the company’s annual greenhouse gas emissions assessment (expressed as tons of carbon dioxide equivalent) divided by annual revenue.There are serious precision and accuracy issues with this approach. Public domain emissions estimates, such as those gathered by Trucost, are by definition self-declared, and were produced using dissimilar protocols. Normalization techniques can only overcome so much.
The things investors most need to know are not indicated up front!
Lacking third-party, independent validation and absent nationally standardized GHG-e emissions measurement protocols, this service puts a micrometer on a fog bank - so to speak. Missing items include: How far up the supply chain do the emission calculations go; do the estimates include shipping and on-ground distribution; does it capture electricity supplied to leased versus owned offices, to contract manufacturers; how much of a joint venture (JV) is included; and, is company travel captured?
By choosing to screen "out" carbon intensive companies, the index is likely to end up focused on banking, insurance, government contracting, real estate development, and other, similar sectors. And, it takes investment pressure off those sectors that most need to improve by reducing their fossil energy dependencies.
However, by leaving out the most carbon-intensive businesses on the 500 list, S&P; avoids being attacked in the fog of war that is about to ensue, once a carbon Cap & Trade mechanism is in place and that heavily increases operating costs for energy intensive businesses.
At least the overall S&P; part of the methodology is clear...as far as it goes. (joking)
The 100 equities with the highest Carbon Footprints, whose aggregate exclusion does not reduce any individual GICSi sector weight of the S&P; 500 by more than 50%, are removed. Historically, the choice to maintain at least 50% of each GICS sector weight provided the greatest reduction in carbon footprint while closely tracking the return of the S&P; 500. Standard & Poor’s also excludes companies, if any, which have not yet been assigned a Carbon Footprint by Trucost.