Climate-related financial instruments attracting more investor interest

Climate Ark, via Financial News: A surge in investor appetite for green funds is leading to a boom for investment banks creating bespoke indices and structured products related to them. As well as derivatives linked to weather, banks are creating stock indices for companies that tackle or are affected by climate change, creating a new investment sector that is uncorrelated to other asset classes.

These stock indices are used in structured products such as bonds or exchange-traded funds, can be shorted by hedge funds, and give investors direct exposure to the performance of the listed company stock.

After the US sub-prime mortgage fallout wreaked havoc on the credit market this summer, an investment sector that is uncorrelated to any other asset class has provided an alternative choice in long-term funding. According to data provider Lipper Feri, about €3bn ($4.2bn) was raised in the top 10 funds in environmental equity and ecological funds in Europe in the first half of this year, exceeding last year’s total by €200m.

…In 2005, investment research firm KLD launched the KLD Global Climate Change Index 100, which tracks the performance of 100 companies from 15 countries tackling climate change. However, this year has seen several investment banks and investment strategists produce more such indices.

Each time a new index is developed, it becomes more sophisticated and holds more stocks. ABN Amro developed the ABN Amro Climate Change & Environment Index comprising 32 stocks each with a market capitalization of $800m (€564m), while UBS launched the first global warming index, the UBS Global Warming Index, which is composed of weather futures contracts in 15 cities, effectively betting on the weather.

S&P developed a clean energy index in August this year, comprising 30 of the largest publicly traded stocks that invest in clean energy. HSBC has just launched the Global Climate Change Benchmark Index, tracking 300 companies from 34 countries that make money from fighting climate change, plus four investable global climate change sub-indices.

Joaquim de Lima, global head of quant research of equities and creator of the indices at HSBC, said: “The construction and stock selection of the indices is based purely on quantitative criteria, such as value generation and liquidity, and these factors will be regularly reviewed.

Other sector indices have been launched but they have a very narrow portion of climate change investments. The HSBC Benchmark is more comprehensive as it captures a larger range of themes related to climate change.”…