FTSE Russell has launched two new fixed income indexes focused on companies that are helping to address the world’s climate problems — the FTSE Fixed Income TPI Climate Transition Index series, and the FTSE Fixed Income TPI Focused Glidepath Index series.
Richard Davies is head of Europe, Middle East and Africa Fixed Income and Convertible Index Product at FTSE Russell, a global company and subsidiary of London Stock Exchange Group that provides benchmarks, data, and analytics to investors. His team has recently launched the two new indexes.
Davies helps to build innovative fixed income index products focused on sustainable and Environmental, Social and Governance benchmarks for developed and emerging markets.
In layman’s terms, Davies designs indexes that serve a dual purpose: as an investment for passive buy-and-hold investors, and as a benchmark (i.e., a market index used by fund managers and investors to measure and compare the earnings of an investment portfolio).
Two fixed income indexes focused on the climate
These two indexes will not only be used as a benchmark for sustainable investments, but will eventually be turned into ETFs or mutual funds that investors can buy.
Specifically, the indexes offer fixed income investments opportunities in companies that emphasize being environmentally friendly. These include businesses that focus on reducing their carbon emissions, increasing their green revenues, and green bonds, as well as those companies committed to the Paris Agreement.
“These two fixed income indices we are launching provide climate aware solutions. It’s a unique approach to fixed income using what we think are the best data sets in the market,” Davies said.
The exciting part about these indexes is their simplicity.
“The beauty of these indexes is they are easy to track and implement. They also offer investors a lower-cost solution,” Davies said.
Because turnover is low (i.e., there isn’t a lot of buying and selling within the index), expenses are kept low.
We already know there is a growing demand from investors and many investment companies to help sustain the environment. Davies explains that what makes these two indexes unique is they were built from a fixed income perspective.
How do these indexes help the average investor?
To understand indexes, investors should understand how they are constructed. To create this fixed income index, Davies and his team spend a lot of time evaluating which companies belong in the index.
Before being accepted into these “low-carbon economy” indexes, financial companies must pass a series of rigorous tests and strict rules. Even if the company is included in the index, it doesn’t end there.
Davies and his team, with help from Transition Pathway Initiative (TPI), monitor companies included in the index monthly to ensure they still meet the climate goals and requirements.
The companies must be transparent, devoted to helping transition to a low-carbon economy, and focused on increasing green revenues while reducing investments in companies with fossil fuel reserves.
Another unique aspect of these indexes is that even if Davies and his team reject a company from being in the index, if the company eventually meets their climate goals, Davies and his team may give the company a second look.
Q&A with Richard Davies
Equities.com dug deeper into these indexes in a Q&A between Michael Sincere and Richard Davies.
Sincere: Why did you launch these two indexes?
Davies: We found there was a demand by investors to include climate metrics into their portfolio. We also have investors trying to figure out the right solution for themselves. We launched these indexes to help fulfill that need.
Sincere: What is the difference between the two indexes?
Davies: Basically, you have an opportunity to achieve better ESG performance with the TPI Climate Transition Index because it is more active in the markets. On the negative side, it comes with higher portfolio turnover. The Glidepath Index series has lower turnover. We believe the two offer a nice balance for investors.
Sincere: Why would an investor want to buy a fixed income index devoted to the climate?
Davies: Many investors want to have bonds as part of their overall portfolio. With a fixed income investment such as corporate bonds, there is less risk, and lower volatility. You will not be subjected to the boom and bust scenarios as when buying equities.
Sincere: The name of your index has the name, TPI, in it. What exactly is TPI?
Davies: TPI (Transition Pathway Initiative), is an independent, global organization that evaluates companies’ progress in helping to transition the world to a low-carbon economy. This helps investors determine when a company has met their climate goals. Because of our alliance with TPI, which is the gold standard for climate-aware index providers, we believe our two indexes are unique, and one of the best at the moment. The TPI dataset is very compelling and exciting for us. Also, TPI is backed by over 150 asset owners.
Sincere: Do your indexes have any competition?
Davies: Right now, there are almost no competitive indexes with the glidepath solution, but that will change in the future. We know that other index providers are building their own versions, but we’re the first at offering two fixed income indexes devoted to climate initiatives using TPI.
Sincere: What is meant by the term “Glidepath,” the name included in your second index?
Davies: A climate glidepath helps investors create portfolios that help achieve their climate goals. The glidepath approach is gradual reallocation of a fixed income portfolio to climate-friendly corporates over time. To establish a glidepath, we determine which companies help reduce the carbon footprint. We may then drill down to determine whether to include that company in our portfolio.
Sincere: Should investors have a mix of fixed income and equities in their portfolio?
Davies: There’s a lot of evidence that shows that mixing equities and fixed income will result in a better risk-adjusted return. It makes sense to have fixed income to protect yourself from volatile periods. Also, fixed income corporate bonds offer you a better return than U.S. Treasuries, and are not as volatile as stocks.
Sincere: Any final thoughts?
Davies: Compared to their European counterparts, U.S. investors are a little late to the game in regards to ESG and climate investments. However, U.S. investors are asking smart questions and doing the right thing. We expect there will be even more interest in climate-related investments and strategies, and that is one of the reasons we are excited about offering these two indexes.
