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Market News

 March 12, 2007
A new Climate Change Bond Index

 New York, USA (GLOBE-Net) - JP Morgan Chase and Innovest Strategic Value Advisors have introduced the first bond index to consider the investment risks and opportunities posed by climate change. The Environmental Index-Carbon Beta platform (JENI-Carbon Beta) is the first corporate bond index to take climate risk into account.

"Until today, bond prices did not reflect an increasingly important financial risk: climate change," said Edward Marrinan of JP Morgan. "With climate exposures factored in, companies' risk profiles - and their bonds - will more accurately reflect the trade-off between risk and return."

The JENI-Carbon Beta is based on the JPMorgan US Liquid Index (JULI), an established benchmark for the U.S. investment-grade corporate bond market. A relative carbon beta score is calculated monthly for each issuer, relative to its sector, by Innovest, the world leader in providing environmental analysis to institutional investors.

The JULI is then "tilted" according to the carbon beta scores of issuers to create the JENI-Carbon Beta. For example, within the automotive sector, an automaker that has curbed emissions from its plants and produces a fleet of vehicles with relatively high fuel efficiency might be over weighted compared to an automaker that has not taken such steps.

The JENI-Carbon Beta is meant to serve as a benchmark for mainstream investors concerned about the financial impact of climate change and related regulation, as well as for funds mandated to seek out investments that meet particular environmental criteria. Back testing by Innovest confirmed that the JENI-Carbon Beta closely replicates the characteristics of the JULI, while reducing investor exposure to the financial risks arising from global warming.

The important consideration for investors is the net risk exposure, "not superficial, one-dimensional, static figures on gross emissions", noted Innovest Chief Executive Matthew Kiernan.

The new index is a reflection of the growing awareness among investors of the financial risks and opportunities created by climate change. Through physical changes, potential regulation, and changing economic and environmental conditions, many businesses will see climate change will have direct impact on their bottom line. Investors wish to protect their assets against uncertainty, and many are pushing companies to improve greenhouse gas management strategies and disclosure, with the implied suggestion that their investment resources may be reallocated if such actions are deemed insufficient.

A key issue has been a lack of non-financial information for investors. As climate risks become more material, investors need tools and information to evaluate their carbon-risk exposure that traditional financial statements do not adequately capture.

Tools such as the JENI-Carbon Beta allow for more comprehensive risk analysis by investors, and offer an opportunity for leading companies to be recognized for actions to reduce emissions and create long term value.

This integration of environmental, social and governance (ESG) factors into investment decision making is key to preserving economic assets and natural capital, concluded a recent report from the National Round Table on the Environment and the Economy (NRTEE).

  • See: Linking Capital Markets and Sustainability
  • The JENI-Carbon Beta can be accessed at www.jpmorgan.com/jeni.