Reporting from Copenhagen
Standard & Poor's, in partnership with the World Bank Group's International Finance Corporation, launched the world's first emerging markets index based on carbon efficiency today in Copenhagen.
One of the key discussions at the international climate change talks under way this week is how to construct an adaptation and mitigation package with sufficient funding to meet the needs of developing countries. Wealthy countries have been harshly criticized for not promising enough, notably by Sudan's Lumumba Di-Aping, chairman of the G77 plus China working group, who decried that "ten billion dollars will not buy developing countries enough coffins."
Rachel Kyte, vice president of the IFC Business Advisory Services, explained today that adequate long-run financing is difficult to come by in developing countries to begin with, and more so now with the financial crisis. Developing countries will need access to private sector financing to fill the public sector finance gap if they are to meet future carbon emissions targets.
The new index is one answer to both increasing private financing and fighting climate change.
Its goal is to mobilize more than $1 billion for carbon-efficient companies in the developing world over the next three years and to encourage competition among companies to lower their carbon footprints.
"The importance of ensuring that the companies that will be part of the story of the future have good access to good capital can't be underestimated," Kyte said.
The S&P/IFC Carbon Efficient Index will closely track the S&P/IFC Investable Emerging Markets Index but allow investors to exercise their market preferences for economically and socially sustainable business practices.
Several funds already allow investors to put their money in environmentally responsible companies. A number of institutional investors operate this way, but according to Kyte, they do so at the cost of "large distortions" in their portfolios. These funds are also still largely invested in companies in developed countries.
The point of the index is to bridge the gap.
"Capital increasingly needs and wants to seek out diversifying portfolios in developing countries so they can invest in lower carbon intensive firms. With those two dynamics at play, we've been looking very seriously at how to help that capital find those better investments in developing countries," Kyte said.
The new index is constructed of companies from 21 countries, led by China with 17% of the companies, Brazil with 15.9%, South Korea with 13.4%, Taiwan with 12.3%, and India with 8.5%. The average carbon footprint among the companies is 24% lower compared with the S&F/IFC LargeMidCap index, according to the World Bank and S&P. Carbon emissions are standardized across countries and audited by TruCost Ltd., a UK carbon accountant.
By sector, the index is most heavily weighted in financial, energy, information technology and materials.
Substantial investment is needed in infrastructure especially, which is historically difficult to fund in developing countries. It is estimated that Africa alone needs annual investment in infrastructure of the equivalent of 2-3% of global GDP to keep pace with energy demand. Emerging markets like China and South Korea, both included in the index, are well positioned to do business and adapt technology to other developing markets in the future. In fact, since 2003, Chinese infrastructure investment in Africa has increased from $1 billion annually, to $6 billion.
"If carbon investing becomes broadly recognized over the next several years, we may see the original index lose market share to the new index. Indeed that would be very encouraging," said David Blitzer, chairman of the Standard and Poor's Index Committee. "In the best of all world, the two indices merge."