Solactive, the index provider, compiled the benchmark in a fortnight after a few conversations with the Climate Bonds Initiative, the London NGO which has basically kept a list of green bonds.
This is not an index to compare with the detailed methodologies underlying indices like the FTSE4Good, or the work done by MSCI, which grades over 5,000 corporate and government issuers for ESG.
But the index is likely to satisfy the green bond market’s needs, for now. The market is a curious beast, combining issues by single-project wind or solar companies with deals by huge development banks with proceeds ringfenced for green causes.
Green bonds are an adjunct to investors’ wider effort to choose between issuers of equity or bonds according to their environmental qualities.
Credit to Solactive for an index that could help fund managers focus on the environment. That is also the goal of the Climate Bonds Initiative, which has put tremendous effort into popularising environmental investment and creating a Certified Green Bond label, like the Fairtrade badge for food.
But market participants should be wary of the financial industry’s hunger for labels and indices. The danger is that investors stop thinking about environmental issues for themselves.
That is a particular risk because financial professionals do not always trust their own judgement in this area, and are happy to be guided by others.
But environmental decisions are not simple — they are even more complex than credit judgements. Is nuclear power good or bad? The answer is, it depends — and there will never be one right answer.
The mushrooming biofuels industry has shown how easily investments can be made that don’t help the climate by people who think — or claim — they are doing good. The remedy is not standard labels, but individual thought.