S&P Launches Global Carbon Indices

Mar.11.09 | About: iPath Global (GRN)

Standard & Poor's has launched the first in a series of global low carbon indexes, which could eventually lead to a third exchange-traded product being made available to U.S. investors focusing on that corner of the alternative energy market.

The S&P U.S. Carbon Efficient Index will measure the performance of large cap U.S. companies with relatively low carbon emissions, while seeking to closely track the return of the S&P 500.

The new S&P benchmark will have some competition. Last year, Merrill Lynch launched its own MLCX Global CO2 Emissions Index. At the time, index officials said they hoped to base an ETF off the product.

The S&P U.S. Carbon Efficient Index is different from both the Merrill Lynch product and the exchange-traded products now out. The AirShares EU Carbon Allowances Fund (NYSE: ASO) is actually a commodity pool that tracks a basket of exchange-traded futures contracts for European Union Allowances [EUAs]. Each contract provides for delivery of 1,000 EUAs at a specified price.

Since the commodities involved aren't physically deliverable, ASO can't be considered an ETF. But it acts like many exchange-traded commodities products that are popular in Europe. It's also important to note ASO represents a pool of futures contracts rather than notes.

That's significant since another type of fund, referred to as an exchange-traded note, is already on the market. In late June, Barclays Capital gained first-mover status into the U.S. exchange-traded products market for carbon emissions with its iPath Global Carbon ETN (NYSE: GRN).

Carbon emission credits are traded by companies who get tax breaks and other incentives for lowering pollutants into the air. These standards are designed to set limits on the amount of a pollutant that can be released into the atmosphere and allocates credits among companies creating emissions. Those that do not use all their emissions credits can sell them to companies that need them.

By some estimates, the global carbon market is worth more than $50 billion a year.

The new S&P index includes 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 more than 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, according to S&P.

(Carbon Footprint is calculated as the company's annual greenhouse gas emissions assessment, expressed as tons of carbon dioxide equivalent, divided by annual revenue.)

The Index is rebalanced quarterly at which point the stocks in the S&P 500 are ranked by their carbon footprint. The 100 equities with the highest scores and whose aggregate exclusion does not reduce any individual sector weight of the S&P 500 by more than 50%, are removed.

Interestingly enough, S&P says the average annual carbon footprint of the S&P U.S. Carbon Efficient Index was 48% lower than that of the S&P 500.