The University of Cambridge is working with Bloomberg Index Services Limited (BISL) to launch a corporate bond index which will be the first bond index designed to help investors address fossil fuel expansion behaviour.
Alongside the University of Cambridge, the index will be used at launch by investments from the United Nations Joint Staff Pension Fund.
Even before the index is available, the University and the UN pension scheme have indicated that they expect to move up to $750million of their investments to track the novel bond index, which excludes companies expanding production or infrastructure related to climate-damaging fossil fuels. The index will be available to the market as a whole, for asset owners and managers to invest against.
Approximately 90 per cent of new financing for fossil fuel expansion comes from debt markets. This is made up of loans and bonds, making debt one of the most impactful levers for investors to contribute to halting climate change. Bond indices play a critical role in auto-allocating new capital to companies in the real economy.
The University noted in its launch statement: “This new index will support investors who seek to invest consistent with their individual investment goals in this space.”
The bond index initiative began with a peer-reviewed paper by Dr Ellen Quigley, principal research associate at the Department of Land Economy at the University of Cambridge. The paper explored the case for evidence-based climate impact by institutional investors. This was followed by an internal feasibility study based at Jesus College, Cambridge (which continues to co-host the project), supported by several other parts of the University.
Following the successful feasibility study, the project began a Request for Proposals, with strong interest indicated by the key index provider firms. However, none of the firms could initially develop the index required: they lacked data, specifically regarding assessing companies based on their activities (eg whether they were building new fossil fuel infrastructure) rather than their business classification. Novel data sources including from Urgewald – a non-profit environmental and human rights organisation based in Germany – have been introduced by Bloomberg Index Services, the appointed provider. The goal was to provide an effective solution for asset owners looking to align their corporate debt instruments with their climate targets and to avoid both ineffective blanket interventions and greenwashing.
Several years of close collaboration with leading global asset owners such as California State Teachers Retirement System (CalSTRS), Universities Superannuation Scheme (USS), Swiss Federal Pension Fund PUBLICA and the United Nations Joint Staff Pension Fund (UNJSPF) provided input and technical market expertise that underpins the index.
Project leader Lily Tomson, a senior research associate at Jesus College, says: “We have been developing the framework which underpins the index for over three years, with the past year focused on index development work with Bloomberg, as well as with these and other asset owners.”
She added: “Asset owners are the most powerful actors in the investment system; they are the adults in the room right now. We’ve worked with some of the largest to cut to the core of the climate crisis. As asset owners continue to assert their needs for investable products that address systemic risk, this will flow through the investment system. We’re delighted to be building this index with Bloomberg, and very grateful for the support of key global asset owners.”
The index will help to address climate risk within investment portfolios. “Asset owners are increasingly seeing the need to take a leadership role in addressing climate change, which threatens the long-term future of their portfolios and the wider economy”, said the University in its launch statement.
The index is a game-changer for the growing number of asset owners who invest in corporate debt and understand its impact on fossil fuel expansion, particularly the construction of new fossil fuel infrastructure – such as coal- and gas-fired power plants – which risk locking in fossil fuel usage for decades.
The index is not expected to impact the University of Cambridge colleges directly, nor relate to their divestment activities. Colleges including King’s, Trinity, Peterhouse, Christ’s and Selwyn who have yet to fully divest from fossil fuel-related investments do not have investments in this asset class, the Cambridge Independent understands. The colleges largely invest independently of the central University.
Details of the University of Cambridge’s guidelines on fossil fuel investments are available here.
Dave Gedeon, CEO of BISL, said: “We are excited to work with the University of Cambridge and support their collaboration with leading asset owners. Bloomberg transition risk analytics provides the support to Cambridge’s innovative methodology to transform this index into a tool for asset owners to address their goals of engaging corporations with the latest academic evidence for impacting change in the real economy.”
Anthony Odgers, chief financial officer of the University of Cambridge, said: “This is an enormously impactful project which showcases the high-quality research undertaken at Cambridge.
“The index is a game-changer for the growing number of asset owners who invest in corporate debt and understand its impact on fossil fuel expansion, particularly the construction of new fossil fuel infrastructure such as coal- and gas-fired power plants which risk locking in fossil fuel usage for decades.
“Once the index launches, the University of Cambridge expects to invest some of its own money against financial products referencing it. This will enable us to align our fixed income holdings with our institution-wide objectives.”