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Environmental lobby group backs creation of ex-fossil fuel index

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The Natural Resources Defense Council (NRDC) has funded the creation of FTSE Group’s ex-fossil fuel index, for global passive investments excluding exploring, mining and reserve holding companies.

FTSE created the index at the request of the NRDC, a US-based lobby group, which will also provide a seed investment.

The pair also worked jointly with asset manager BlackRock, which will launch a fund matching the new index using seed finance from the lobby group.

FTSE said the request from the NRDC was not to create a bespoke index for its own equity investments but one that could be used as an industry benchmark.

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Kevin Bourne, managing director at FTSE, told IPE that, while it was not for FTSE to dictate for customers, including pension schemes, to divest, it would provide solutions to do so.

“Institutions are either engaging with fossil fuel companies, tilting away from carbon or in some cases divesting,” Bourne said.

“It is not for us to say whether our customers should divest, but if there are those that wish to, we have made sure we have a product in that space.”

Bourne said that while some customers may use the index to divest from fossil companies, others might use it to measure and model the index over time to use within risk-management processes for overall portfolios.

The idea of divestment over moral and ESG issues has sparked debate throughout the industry.

The UK’s Law Commission explained environmental factors could be taken into consideration for divestment, overruling previous requirements focusing solely on financial return.

However, the Environment Agency Pension Fund, a £2.2bn (€2.7bn) scheme, was recently urged not to divest from fossil-fuel stocks held passively and told to engage with companies over their carbon exposures.

A senior legal figure also recently said UK local government schemes may divest but only if members are not financially affected.

FTSE’s index works on an exclusion basis and will remove any company that conducts exploration or production in oil, gas and coal, has revenues from coal mining, crude petroleum or gas production, or is proved to have reserves in coal, oil or gas.

Gordon Morrison, also managing director at the index firm, said that, due to the nature of the index, it would remain sensitive to the performance of the excluded stocks.

“We are not managing the risk of these companies,” he said.

“We have tracking error in the portfolio, so we would not expect to track the main indices closely, but it is not a variable we are looking for. So we will get the resulting performance and are sensitive to resulting performance of the excluded stocks, and will never avoid that.

“There will be a trade-off between the expected risk and expected reward.”

ShareAction, a UK lobby group, welcomed the launch of the index.

Chief executive Catherine Howarth said: “We will be bringing them to the attention of UK pension funds whose beneficiaries are demanding stronger attention to the financial risks presented by climate change and climate regulation.”

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