Markets turn to fossil-free finance

Observers of the financial markets will be eager to see how the companies in the FTSE Fossil-Free Indices perform

Observers of the financial markets will be eager to see how the companies in the FTSE Fossil-Free Indices perform

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This week, secretary of IoM Friends of the Earth Cat Turner looks at the introduction of new ways to measure investment that doesn’t accelerate climate change that’s already causing havoc, both locally and abroad

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I’ve written in the past about the many ways in which financial services organisations need to be acquainting themselves with the sustainability agenda.

That is, how humankind – and economic players – acquaint themselves with the massive changes that are taking place in the way we do things if we’re to have a habitable planet.

Indeed, I sometimes run training sessions and seminars for key decision-makers in organisations on just these topics – and I’m always enthused by the way in which they ask not only about the new laws, codes of conduct and rules affecting financial services players, but also about the ways in which they can embrace this new ‘green’ agenda, and help create a vibrant and creative new economy based around emerging technologies and the means of funding them.

It’s great to see, and it’s absolutely appropriate: this new world that’s already upon us is chocka-block with opportunity, hope, new jobs and the thrill of innovation.

These changes run the gamut of the industry, from banking to investment, personal lending and project financing, to insurance and community ownership vehicles.

It’s a fast moving area and I feel lucky to be on the committee of the UK’s Institute of Financial Services’ Sustainability, which is focused on how to embed the requisite knowledge and skills in the financial services employee base.

It affords me a really good insight into what’s new at global government, and UK, levels.

Not only does this keep me well informed, but it also gives me lots of optimism – if financial businesses and governments are driving these changes so fast, there’s truly a decent chance that we can adapt society’s behaviour fast enough to prevent further damage from climate change.

So it was very satisfying to see news last week of the launch of a set of new and long-awaited investment benchmarks, the FTSE Fossil-Free Indices.

These are the result of collaboration by FTSE, the global index provider, Blackrock (which is the biggest investment fund manager in the world), and environmental NGO The Natural Defense Council from the US.

It’s big news: so much so that the UK’s Financial Times described it as signifying that ‘a global campaign against fossil fuels is entering the financial mainstream’.

Why’s this happening?

Well, it’s definitely not just altruism (though it’d be lovely to imagine that bankers and fund managers were concerned to protect the wellbeing of at least their own children, if not everyone else’s!).

It’s also a result of investor pressure to stop putting their money into things which are now proven to be destroying much of mankind’s options in terms of feeding and housing itself and generally living safe and comfortable lives.

One of the most significant things an investor, or a lending banker, can do is to stop funding the ‘fossil fuel industry’ – that is, the prospecting for, extraction and distribution of coal, oil and gas.

This is known as the ‘divestment movement’, and it’s rapidly changing the investment arena – in fact any mainstream investment manager who isn’t busy boning up on the carbon risk inherent in his portfolio, and how to manage it out, is due a wigging from his bosses and clients.

Campaigning organisation 350.org can take a lot of credit for this new development; the ‘FTSE Developed ex-Fossil Fuels Index Series’ came about after it successfully put pressure on a number of key institutional investors, to cut their fossil fuel holdings to zero.

In addition, the Carbon Tracker project promoted the idea that ‘carbon stranded assets’ are responsible for significant over-valuations in people’s investment portfolios.

Think about this: is your personal pension, or your share portfolio, taking on too much risk because the shares in it are wrongly valued?

This could well be so where share valuations don’t yet take into account the inevitable downgrading of assets that won’t be exploitable, if we’re to avoid runaway climate change.

Already many assets (for example shares in construction companies) have been affected by EU Directives on energy efficiency – and this is going to accelerate as UN and other conventions force governments to enact ever stricter laws.

Of course, the proof of the pudding’s in the eating.

How will investors react if the companies in the ‘Fossil-Free’ indices perform worse than the fossil fuel exploiters?

The whole thing could backfire spectacularly on the green movement.

But given the direction of legislation and the normalising of environmentally-responsible behaviour, I suspect not.

In fact I suspect this’ll be the start of something powerful and positive. Hurrah!

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