Even without a global government consensus on climate change action, the business world continues to move ahead. Recently the S&P 500 launched a ‘Carbon Efficient Index’ to assist investors and fund managers in finding companies that are responding best to climate change.
The S&P Index aims to profile companies doing the most on climate change and uses a metric of total emissions to total company revenues in order to determine the most ‘effiicient’ companies in each sector. This is a simple and interesting approach; unfortunately, their work focused more on excluding the 100 worst than finding the best. If 400 of the 500 companies in the S&P 500 are actually carbon inefficient, this index will still only screen out at most 100 of them, leaving the other 300 inefficient companies with a ‘carbon efficient’ label. Additionally, the desire to maintain a 50% market cap weighting in each sector means that potentially even big inefficient polluters will have to be included.
At the end of the day, if you’re an investor that is concerned about climate change, it is still better to follow the S&P Carbon Efficient Index than the S&P 500.
Valuing of externalities continues to grow and putting a cost on climate change (or carbon in particular) is just the first step towards true cost pricing for resources currently outside the economic system like water and ecosystem services.