Climate Leadership Index Selects Best Performing Companies

When you make a financial investment, you’re usually thinking about your own future, not the world’s. It’s a choice we’ve generally had to make in the name of looking after ourselves. That’s how it used to be, anyway. But, like many things, this too is changing.

Now you can look at companies through an objective lens that compares their climate impact relative to others in their same line of business. What you find are companies at the top of that list that are not only behaving responsibly, but are also consistently outperforming their peers when it comes to financial returns.

The lens is the recently launched the Etho Climate Leadership Index (video), developed by Etho Capital. We had the opportunity to speak with Etho founders Ian Monroe and Conor Platt on the day after the announcement. Platt explained how "the climate leadership process creates the underlying index."

“The index,” Monroe explained, “is a positive screen to select the best performing companies in all industries.”

This is based on data provided by Trucost, which is widely believed to be the most objective and reliable source of such data based on the Scope 1-3 emissions, as defined by the EPA. The metric used is actually the greenhouse gas (GHG) emissions divided by their market capitalization, which is taken to represent the company’s climate efficiency. To meet this threshold, a company must have an emissions profile that is 50 percent better than the average in its industry.

All of those in the index are selected through this process. Using a data-driven sustainability process can cut through corporate greenwashing that other sustainability rating systems miss. In a passing comment, Monroe noted that Volkswagen was eliminated from the climate leadership index based on high company-level greenhouse gas emissions relative to other automakers. Meanwhile, the Dow Jones Sustainability Index was giving Volkswagen an award for achievement at the same time that news was breaking about the company cheating on pollution tests.

Finally, certain companies are eliminated on an individual basis if they have been considered bad actors by those monitoring the industry in question. This includes certain companies in timber, mining, some consumer products and palm oil whose actions are judged to exclude them from being considered sustainability leaders.

The index was created looking back 10 years into the past. Based on market performance over that time period, the Climate Leadership Index outperforms the S&P 500, the most commonly known broad-market index, about 60 to 70 percent of the time. Etho Capital expects to launch some financial products, based on its index, in the form of exchange traded funds (ETFs) in the very near future.

This timely development should be most welcome by anyone concerned about climate change and sustainability who is in a position to invest. Of course the concept of socially responsible investing is not new. This index is more specific though and, Monroe explained, it’s “the only index that combines quantitative climate-efficiency data with a fossil-free and socially responsible approach to investing.”

S&P Dow Jones recently announced two funds: the S&P Global 1200 Carbon Efficient Index and the S&P Global 1200 Fossil Fuel Free Index, but the criteria, claims Monroe, is less rigorous than Etho Capital’s.

In the first case, emissions data is only used to re-weight sectors, “so you're still investing 6.4 percent of your money in energy (aka coal, oil and gas). So, the index is not fossil free.” In the second case, companies are fossil fuel free, but there is no carbon efficiency data used, which has been shown to provide superior results. There is also not, in either case, additional screens provided for social responsibility.

"What S&P is doing is a nice start, but most sustainable investors will still be a bit disgusted when they dive deeper into what their indexes actually contain," Monroe said. "What Etho is providing is an index solution that a socially responsible investor can fully dissect, and feel good about what they find.”

Image credit: Pixabay