Environmental Tracking

Environmental Tracking directly puts pressure on the greenhouse gas emissions of constituent companies and their supply chains and seeks to stimulate investment into clean energy and other clean technologies

Fast facts:

The Environmental Tracking Carbon Rankings currently publicly rank the largest 1,300 global companies by market size, with their database covering 2,400 in total.

The problem

‘Carbon risk’ has come to the fore in recent years as investors become increasingly aware that government action on climate change is limiting carbon emissions. As a result, investors want to know how regulation and a shift away from fossil fuels will impact their portfolios. Institutional investors are under increasing pressure from groups such as the Asset Owners Disclosure Project and the Fossil Free divestment campaign to explain to stakeholders what their exposure is and what they are doing to reduce it. The Environmental Tracking Index is positioning itself to capitalize on the fundamental trends of increasing awareness of carbon risk and increasing index-investment by creating a mainstream index series that lowers carbon risk.

The solution

Environmental Tracking (ET) is designed to push up the cost of capital for companies engaging in carbon-intensive activities; while lowering the cost of capital for carbon-efficient companies. It is designed to provide companies with an incentive to invest in clean energy and other clean technologies in order to improve their cost of capital and improve their share price. The activity offers the opportunity to harness the power of the financial markets to effectively put a price on carbon, independent of government action. ET does this through a series of public carbon rankings, scoring the world’s largest listed companies by their GHG emissions; and, a series of stock market indexes, which re-weight companies based on their position within the rankings. By shifting demand for company shares in line with emissions, this mechanism provides a means to link company share price to greenhouse gas emissions, thereby effectively putting a price on carbon. As a core component of Environmental Tracking is a public Carbon Ranking scoring the world's largest listed companies according to their Greenhouse Gas emissions across Scopes 1, 2 and 3, this initiative offers the ability to measure its own success and effectively track the increase/decrease in emissions of the constituent companies over time.

Helping the planet

Once the Environmental Tracking mechanism achieves sufficiently large scale, the notion of integrating an extra-financial environmental indicator into the valuation of companies on the stock market would have been achieved and made mainstream. From an economic point of view, firstly, once successful, this initiative would create an economic incentive for each company to lower its emissions that cuts to the core of a business' raison d'etre - to generate shareholder value. Under the Environmental Tracking system if a company pursued an environmentally damaging course of action its share price would be damaged as a result since its weighting would decrease in the ET Index. This initiative would also provide companies with a clear incentive to invest in clean energy and other clean technology solutions in order to 'green' their operations and gain a greater weighting within the index.

Helping people

If successful, every human on the planet will benefit and in particular the marginalized and poorest in society - since they are the groups that will be hit hardest by climate change. There are approximately 3,000 of the world's largest financial institutions that effectively control the majority of the world's capital. These financial institutions are the activity’s target group.

Scaling Up

The Environmental Tracking Index Series is designed to be global, to cover all companies anywhere in the world and has the ability to expand rapidly. Whilst the system is currently operational for listed equity investments, the methodology can be applied to any type of index covering any financial security that can be linked back to a corporate entity. This same methodology could also be applied to a sovereign bond index for example, we would simply require country level data.