March 06, 2007
New Bond Index Focuses on Climate Change
by Anne Moore Odell
JP Morgan Chase and Innovest introduce the first bond index that addresses climate change risks and
Investors interested in finding climate friendly corporations have a new tool with the introduction
of JP Morgan’s Environmental Index-Carbon Beta platform, called JENI-Carbon Beta. This is the
first corporate bond index to consider climate change. Launched in the last week of February by JP
Morgan Chase (JPM) and Innovest Strategic Value Advisors, the index is designed to
help investors make decisions considering the risks and benefits of corporate bonds with regard to
"Taking into account environmental and
social issues isn't just about good corporate citizenship, its becoming an essential part of risk
management for investors," Brian Marchiony, JPMorgan Chase spokesperson told Socialfunds.com
"The fiduciary equation is being turned on its head: increasingly one can be seen as derelict
in one’s fiduciary responsibilities if one does not address climate risk in some manner. This is an
180-degree reversal of previous thought—and practice," stated Dr. Matthew Kierman, founder and
chief executive of Innovest, a research and analysis firm.
JP Morgan’s JENI-Carbon Beta
uses its US Liquid Index, also known as JULI, as its universe of companies. For corporate bonds to
be considered by the JULI, bonds must have a rating of Baa3 by Moody’s or BBB- from S&P with an
issue size of at least $300 million. Also, the bond’s corporate entity must have al least $1
billion of outstanding fixed rate bonds. In addition, bonds need to have a maturity of at least 13
months, but no longer than 31 years.
Innovest is working with JPMorgan Chase to determine
a Carbon Beta score for each bond issuer by sector on a monthly basis. The JULI index will be
recalculated with these Carbon Beta scores to create the JENI index.
"Innovest's proprietary Carbon Beta calculations are quite complex and intricate, but the
principles and building blocks are themselves quite straightforward."
Each bond’s Carbon
Beta rating by Innovest is a function of three macro-level variables. The first variable is the
absolute level of a company’s climate risk exposure. The absolute level takes many things into
account, including the industry sector, fuel used for energy input, and the company’s state of
technological readiness. The second variable is the company’s risk management, including its board
and senior executive. The last variable that Innovest considers is the company’s ability to
recognize profit opportunities.
"What should matter to investors is the net risk exposure,
not superficial, one-dimensional, static figures on gross emissions," Kierman told Socialfunds.com.
Another aspect of Innovest’s approach is that it interviews senior executives of all of
the companies they rate. It also analyzes each industry before rating any one specific company.
"Initially, we expect that major institutional investors such as CalPERS, CalSTRS, New
York City, and the State of Connecticut, for example, will begin to use it as a benchmark against
which to compare the performance of their existing bond investments," Kierman said. "Over time –
and perhaps very soon, some investors will ask that investible products be created based on the
Many investors, working with both SRI investment firms and mainstream investment
firms, are concerned about climate change. Many factors play into the rapid growth in public
awareness of climate change and global warming. Some of these factors include the Stern reports, Al
Gore’s movie "An Inconvenient Truth" and the latest IPCC report. Of course, the unusual weather
that people are experiencing first hand around the world moves climate change to the forefront of
"Climate change specifically, and corporate responsibility more generally,
are very important issues for many of our clients and have been for many years," said Phil
Kirshman, Director of Business Development at Progressive Asset Management from Denver.
"The more information that investors have, the better decisions they can make," Kirshman said.
"I'm happy to see an index that applies environmental screening to the fixed income market."
"Increasingly, as awareness of climate change issues and carbon impact are being elevated
across the globe, we are seeing related accretion of communications on such issues across
institutional investor platforms," said Mary Jane McQuillen, Director, Social Awareness Investment
Program, at ClearBridge Advisors, a division of Legg Mason. "While the discussion of climate change
has not been a new phenomenon," she explained, "the expansion of listeners has been."
"Socially responsible investing (SRI) is becoming a significant growth area Wall Street and
JPMorgan is committed to exploring critical environmental issues. We will continue to encourage
analysts to examine governmental, social, environmental and ethical issues in their work," JP
Morgan’s Marchiony said.
Innovest reports that asset owners have $30 trillion in bonds,
with the US market accounting for roughly $5 trillion. With this huge amount of money invested in
bonds, this new index is aligning investors’ concern with climate change and what it means for the
future. Bonds, with their fixed maturities and relative stability, are investments in the future.
Many investors are banking on a green one.
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