Published on 04 December 2017

SUSTAINABLE FINANCE

[INSIDE STORY] Could financial risks in oil and gas influence the way market indexes measure financial performance?

The Norwegian government must decide if its sovereign wealth fund will divest from the world’s major oil companies, a decision that could change the way stock market indexes measure financial performance. This announcement was a wakeup call for the finance world, which still measures its performance based on benchmark index that are raising the planet’s temperature!

Statoil's Mariner A platform. The Norwegian government is the largest shareholder, owning 70% of the company.
Statoil

When Norges Bank, which manages the Norwegian sovereign wealth fund, warned of the fund’s financial risks, it "proposes that it divest from oil and gas, the very industry the fund was built on". This is a strong message that highlights the role of high-carbon indices in a financial industry that is largely following a path to global warming beyond 4 degrees.

The Norwegian fund manager, one of the largest global shareholders with more than 800 billion euros in assets, sent two major shockwaves through the financial markets on 16 November. First, concerning the economic risks the fund is exposed to by buying shares from major listed oil and gas companies. All while part of its wealth is being derived from the exploitation of these fossil fuels. The second aspect went unnoticed. The Norwegian bank specified that companies should favor indexes that exclude oil and gas in the evaluation of their financial performance.

Changing the way stock markets measure performance

The oil companies affected are corporations with the largest market capitalizations in the world: Exxon is one of the top ten stocks in the S&P 500 and is the only industrial company amongst the likes of Apple, Google and JP Morgan. Total is a CAC40 heavyweight (second only to LVMH and occupying nearly 8% of the index).

The Norwegian bank, which boasts exceptional financial performance, has given the greenlight to many other investors in the world. Today, this global management mega-player has encouraged financial actors to measure their performance differently and go against traditional methods that are following a path to global warming beyond 4 degrees.

This is consistent with the results of a study conducted in July 2017 by Mirova, a subsidiary of Natixis that specializes in sustainable finance. It demonstrated that all the major benchmark indexes, mainly due to the large size of the most greenhouse gas-emitting companies, are on global warming trajectories that are unsustainable for the planet.

Benchmarks responsible for soaring global temperatures

"The flagship index for the Paris market, the famous CAC 40, is one of the most high-carbon indexes in the world!", explains Hervé Guez, Director of Responsible Investment Research at Mirova. "Our innovative methodology is based on data that considers not only direct and indirect greenhouse gas emissions but also" avoided emissions,” or practices that value the development of low carbon solutions."

The Norwegian bank has just supported this practice by explaining that we must limit the use of “thermometers” that are warming the planet. The problem is that they are used by the entire financial sector to measure financial performance and to heavily invest, since index management is constantly expanding.

For ordinary citizens, these indexes are also used as code names in the media to forecast the stock market. But to limit global warming to 2 degrees, an objective decided upon in the Paris Agreement, isn’t it necessary to imagine new headlines: "Today the CAC 40 and the Dow Jones have lost 10% and that’s good news since “Objective2Degrees” indexes have increased by 15%!" Wouldn't that be daring ? 

 

Anne-Catherine Husson-Traore, Directrice générale de Novethic, @AC_HT_ 


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