Etho Capital, the US-based sustainable investment manager, has launched the Etho Climate Leadership Index (ECLI), a diversified index that is divested from fossil fuels and focused on climate efficiency in other industries. The company plans to launch an exchange-traded fund based on US equities in the index later in 2015.
Etho Capital’s new index aims to target carbon-efficient sustainable companies.
Developed by the team at Etho Capital, the index combines quantitative climate efficiency data with best-in-class sustainability screening to produce an index with reduced exposure to companies involved in carbon intensive activities. In addition to contributing to the risk of climate change, the inherent risks of these companies’ operations can also pose a risk to long-term portfolio performance.
The inclusion of an environmental, social and governance (ESG) screen in the index methodology looks to favour companies who operate sustainably. “Companies with efficient supply chains and management teams that plan for the long run are likely to do better in our changing climate,” said Conor Platt, Co-Founder, Chief Executive Officer and Chief Investment Officer of Etho Capital.
“ESG impact investing is one of the fastest-growing segments in asset management today, with leadership at many top wealth management firms proactively seeking out these investment strategies. At Etho Capital, we operate in a world where financial returns are synonymous with a thriving environment.”
The growth in sustainable investing is in no small way tied to the risk that rising global temperatures pose a tremendous risk to future generations. The 2° Investing Initiative, a climate change think tank, has been working to align the financial sector with the goal of limiting temperature rises to an acceptable two degrees centigrade. Talking to the FT, Stan Dupre, founder and global director said, “Indirectly, investors are betting on a scenario of four to five degree warming. This is not a winning bet, as the technologies of the future are being deployed outside investors’ portfolios.”
Ian Monroe, Co-Founder, President and Chief Sustainability Officer of Etho Capital, said, “Our new index and back tests show that investing in diversified climate efficiency has yielded higher returns for the past decade. Climate leaders generally outperform climate laggards in most industries, and we think this trend will accelerate in a carbon-constrained future.”
To be included in the index, companies must meet standards of fossil free and socially responsible investing. Etho Capital use a positive selection methodology to review more than 5,000 of the most commonly traded public companies and identify the most carbon-efficient climate leaders in each industry. Using climate performance data from environmental researcher Trucost, Etho Capital ranks almost all public companies around the world by carbon emissions per dollar invested to select the index’s holdings. All fossil fuel, tobacco, weapons and gambling companies are eliminated from the index. Finally, a company screen is conducted based on ESG performance data with expertise from non-governmental organisation (NGO) partners and input from global stakeholders.
“The movement to divest from fossil fuels and invest in the clean energy economy is becoming increasingly accessible for all investors, not just endowed institutions and high net worth individuals,” said Vanessa Green, Campaign Director of Divest-Invest Individual. “Thanks to growing grassroots activity in the Divest-Invest movement and tools like the Etho Climate Leadership Index, retail investors can put their money behind high-bar companies and opportunities that usher in a regenerative future while climate laggards like oil, coal and gas companies are on the decline.”