New KLD Index Benchmarks 100 Global Companies Proactively Addressing Climate Change

by William Baue

While the G8 agreement on climate change may amount to hot air, the KLD Global Climate 100 Index will allow investors to support high-profile large-cap companies as well as little-known small caps actively mitigating climate change.

(SocialFunds.com) - The Group of Eight (G8) industrial nations meets today in Gleneagles, Scotland to hammer out an agreement on climate change, the second draft of which "won't even admit that climate change is taking place" in deference to the "US position," according to British critic George Monbiot. While politicians can perhaps afford to scuttle substantive action addressing climate change, capital markets tend to reflect reality more accurately, factoring the effects of climate change on business into their pricing. Such is the rationale behind the July 1 launch of the KLD Global Climate 100 (GC100) Index, a benchmark of companies assessed by socially responsible investment (SRI) research firm KLD Research & Analytics to be proactively addressing climate change.

"The Global Climate 100 includes companies making meaningful contributions to the commercialization of renewable energies such as solar and wind, future fuels such as natural gas and hydrogen, and innovations or applications of new technologies that help to reduce emissions of greenhouse gases," said Peter Kinder, founder and president of KLD. "These companies alone won't 'fix' global warming, but the Index focuses investors' attention on where the possibilities lie."

KLD created the GC100 in collaboration with Global Energy Network Institute (GENI), a research nonprofit whose mission is "to accelerate the attainment of optimal, ecologically sustainable energy solutions in the shortest possible time for the peace, health, and prosperity of all."

"Jack Brill of First Affirmative Financial Network introduced GENI Founding President Peter Meisen to me at SRI in the Rockies in 2003," Mr. Kinder told SocialFunds.com, referring to the SRI industry conference hosted annually by FAFN. "Peter's index idea intrigued me--I saw it as a way for SRI generally and KLD specifically to help on a critical cause."

Market demand from institutional investors, whose portfolios tend to track indexes, spurred development of the index.

"The general buzz about investments in new technologies and efficiency has been hard to miss, and was confirmed by attendance at the Second Renewable Energy Finance Forum two weeks ago of some 570 people, including representatives of major investment houses that by one estimate represented more than $100 billion in investment capital," KLD Senior Analyst Andrew Brengle told SocialFunds.com, referring to a conference sponsored by Euromoney Energy Events and the American Council On Renewable Energy (ACORE).

The GC100 will benchmark its financial performance against the MSCI All Country World Energy Index, and will be comprise companies from 15 countries: 54 percent from North America, 26 percent from Europe, and 20 percent from the Asia-Pacific region. Unlike the WilderHill Clean Energy Index (ticker: ECO), a modified equal weighted index (meaning that it seeks to balance company representation in the benchmark according to their dollar value), the GC100 will be equal weighted without modification.

With 100 companies in the index, each will be allocated one percent weighting. Interestingly, portfolio companies run the gamut of market capitalization "to assure that large-cap companies do not unduly influence the performance of the index and to channel capital to small companies committed to preventing global climate change," according to KLD.

"Both small pure-play companies and large diversifieds are staking their futures on the promise of renewable energy and alternative fuels," said Mr. Brengle. "General Electric [GE], already a leader in energy efficient products, has invested heavily in wind and solar."

Other large-caps include Johnson & Johnson (JNJ), the largest corporate user of renewable energy in the US according to the Environmental Protection Agency (EPA), and Toyota (TM), which holds 64 percent of the hybrid car market and plans to sell 300,000 hybrids by 2006.

"Germany's Solon AG makes photovoltaics that are built into the roofs of new buildings and the UK's D1 Oils produces biodiesel from vegetable oil," said Mr. Brengle, highlighting two index constituents with the smallest capitalization.

The index also includes FPL Group (FPL), which holds the largest US wind-power portfolio accounting for 43 percent of US wind energy. FPL's portfolio also includes nuclear power plants, which SRI firms tend to spurn due to unsolved radioactive waste storage problems. Some environmentalists, however, consider nukes a viable solution to climate change due to their minimal GHG emissions.

Given this divergence of viewpoints on nuclear energy, the GC100 takes an agnostic stance on nukes, choosing not to screen out companies for involvement in nuclear energy.

"On this particular index, the presence or absence of nuclear capacity is not as important as the utility's commitment to technologies that limit, reduce, or eliminate greenhouse gases," said Mr. Kinder. "However one tricks up nuclear or coal, one is stuck with wastes and lethal extraction and combustion by-products, among other problems--'clean nukes,' like 'clean coal,' is a contradiction in terms."

"There's no such thing, and there never will be, so inevitably some of the GC100 companies will have installed bases that we'd rather they didn't have," he added. "That said, our objective with this index is to recognize the companies that have thought or are thinking beyond the conventional power sources, technologies, and/or wisdom, and we want to inspire other firms to follow their example."