FTSE Russell expands its portfolio of climate risk-weighted indices to include European sovereign debt. The market for green indices, still in its infancy, is arousing the greed of major suppliers.
The world of finance is adorned with green. Still confined to a niche market a few years ago, the big players are now flocking to avoid the risk of missing the trend in green finance. Assets remain limited to this day, but the sector’s growth rates, year after year, make sustainable finance a strategic sector impossible to ignore. The green revolution recently announced by BlackRock, the world’s largest manager, is a striking example. The same trends are emerging among index providers.
FTSE Russell, the largest of them, is due to announce on Thursday the launch of an index on euro area sovereign debt weighted by climate risk. “Today, there are few low-carbon bond indices, most of which relate to the world of equities”, underlines Sylvain Château, the co-founder of Beyond Ratings, acquired last year by FTSE Russell, a subsidiary of the London Stock Exchange Group. Gold, “There is a real demand from institutional investors, it is one of the biggest priorities on their agenda”.
France, a good student
The scores assigned to each country, which weight their weight in the index, are constructed from key indicators grouped into three themes. The transition risk reflects the economic costs necessary to reduce greenhouse gas emissions in order to comply with the scenario of a warming limited to 2 ° C. The physical risk represents the vulnerabilities of a country’s economy to risks climate, while resilience reflects a country’s ability to withstand an exogenous shock. The underlying indicators, some qualitative, are updated every year.
France stands out among the good students, behind Finland. The Netherlands is the European red lantern because of its vulnerability to rising sea levels, while Germany lags behind because of its current dependence on coal in the production of electricity. Following the index reduces a portfolio’s emissions by 7% compared to the traditional bond index, specifies FTSE Russell.
A rapidly growing market
The stakes are far from trivial. The index provider market is one of the most profitable in the financial world, supported by the insane growth of passive management and the increasingly automatic reliance on associated data. The sector’s turnover rose from $ 2.3 billion in 2014 to more than $ 3.5 billion in 2018, according to the latest report from Burton-Taylor, a consultancy firm subsidiary of TP-Icap, that is growth of over 50% over the period.
At the same time, the ESG index segment grew from $ 50 million to $ 157 million, a growth rate almost three times faster. The strong expansion announced by BlackRock in green ETFs is expected to further accelerate the sector. This opportunity is all the more strategic given that the major index providers are less dominant, with market shares of 40% for the three largest players in 2018, against more than 70% in equities and bonds.