The September launch of an index based on environmental criteria, quickly dubbed the "green CAC40" (1), caused a stir amongst specialised media. The stated objective is indeed attractive: allowing French investors to use their life insurance to invest in a financial product based on the 40 most advanced French listed companies on environmental criteria.
Companies were selected amongst the top 120 French market capitalisations according to three themes: climate risk management, water and forests. This plurality and precision distinguishes the index from low carbon or ESG indices, such as the Dow Jones Sustainability Index.
The initiator behind the index, Goldman Sachs, is surprising since it is an institution hardly known for its green financial products. According to Goldman Sachs, the bank saw this index as an opportunity to diversify its offer, with products increasingly requested but with limited supply. "This is a very good sign that a traditional investment bank is embarking on such a product," said Laurent Babikian, Director of Investor Engagement Europe for the Carbon Disclosure Project (CDP), the body providing Goldman Sachs with the environmental data on which the index is based.
Danone, Essilor and Total
The CDP, an NGO that has been collecting data on the performance of 6,300 companies over the past decade, focuses on how companies manage risks and opportunities related to climate, water and deforestation. In its most recent rankings, 11 French companies obtained the highest rating, A (on a scale from A to F, with the lowest score corresponding to a refusal to transmit data), for at least one of these three themes.
A company does not need to have the best score in all categories to join the "green" Goldman Sachs index because the selection is based on averages. However, companies are obligated to respond to questionnaires requested by the CDP. L’Oréal, Danone, Schneider Electric, Essilor and Total are amongst the French companies selected.
Oil companies in a green index? "It can be bothersome, but the Paris Agreement will not be achieved without them. The idea with this type of ranking and index is to push them to become more and more ethical," said Babikian. A version of the index that excludes the oil and gas sector is, however, available.
At the moment, the product is not yet available to individuals. The index must be supported by an insurer to go on the French market. But Goldman Sachs sees great potential, especially in terms of financial performance. The first simulations carried out have already shown the index to out-perform the CAC40, but Goldman Sachs is focusing on the long term.
An efficient tool in the ecological transition?
"We believe that these companies will be better able to adapt to the future context and that they will tend to outperform others," says Marine Abiad, Head of Distribution France at Goldman Sachs. This is also a test for developing new ranges of offers that are currently highly regarded by financial institutions around the world.
But are these financial products, complementary to conventional products, enough to redirect the thousands of billions of dollars needed to transform the economy? For Goldman Sachs, the success of such a product could snowball through a simple market mechanism. When the bank sells an autocall (structured product) on an index, it must buy the shares of the companies that it comprises to maintain a neutral position. If the product succeeds, the stock market price should rise, encouraging companies to stay in this index, and therefore, act in favour of the environment, affirmed Goldman Sachs and the CDP.
However, "we must always look beyond attractive marketing hype. Data is provided by the CDP, which guarantees credibility, but they will be used to build a complex structured product that does not lead to becoming a company shareholder, and therefore, an actor able to weigh heavily on decisions concerning environmental strategy”, stressed Anne-Catherine Husson-Traore, CEO of Novethic. She added, “this looks more like a claim that, similar to the food industry, can lead to disappointment among investors seeking green investments."
Béatrice Héraud @beatriceheraud
(1) The Euronext CDP Environment France index (FRENV)