Cambridge researchers have partnered with Bloomberg to launch the first global bond index targeting fossil fuel expansion. This aims to steer investment towards real-economy emissions reductions, offering a novel approach for climate-conscious asset owners in crucial debt markets
In a significant move aimed at leveraging financial markets for climate action, researchers at the University of Cambridge have partnered with Bloomberg Index Services Limited to launch the world’s first global corporate bond index specifically designed to address the expansion of the fossil fuel industry.
This groundbreaking initiative will cover not only fossil fuel producers but also related sectors such as utilities, insurance, and financing, with the overarching goal of channelling investment towards companies actively reducing their real-economy emissions. At a time when concerns about greenwashing and the effectiveness of current climate finance strategies are mounting, this novel index offers a targeted approach to influence corporate behaviour in the crucial debt markets.
Why a bond index? Addressing fossil fuel expansion
The University of Cambridge’s development of a bond index marks an unconventional yet potentially transformative step. The project originated from peer-reviewed research by Dr. Ellen Quigley, highlighting the need for evidence-based climate impact by institutional investors. Subsequent feasibility studies within the University paved the way for engaging with global index providers.
The selection of Bloomberg Index Services Limited followed an extensive process that acknowledged the complexities of assessing companies based on their actual activities, particularly their involvement in new fossil fuel infrastructure, rather than just broad business classifications.
The rationale behind focusing on bond markets is compelling. While equity markets receive considerable attention in climate discussions, approximately 90% of new financing for fossil fuel expansion comes through bonds and bank loans. Bonds represent a larger capital pool than equities, and a significant portion is traded in the primary market, providing companies with direct access to new funds. Furthermore, the increasing prevalence of passive investment strategies and the subsequent growth of index funds have positioned these benchmarks as significant drivers of capital allocation. This new index seeks to study and ultimately influence the cost, volume, and capital accessibility for companies engaged in expanding fossil fuel operations. As Lily Tomson, project leader and Senior Research Associate at Jesus College, Cambridge, aptly stated, bond markets are “the very coalface of fossil fuel expansion.”
Rules-based engagement: A lever for behaviour change
Unlike traditional blanket exclusions based on business classification, this innovative bond index employs a “rules-based engagement” approach. The methodology excludes and weighting companies based on their current corporate activities, specifically their involvement in new fossil fuel infrastructure development. This nuanced approach creates direct incentives for companies to alter their behaviour. For instance, a company classified as a fossil fuel producer could be included in the index if it demonstrably ceases expansion activities and aligns with a credible phase-down pathway.
This inclusion criterion, allowing companies to rejoin the index upon meeting specific criteria, is a key differentiator. The project leverages previously untapped data sources like the Global Coal Exit List (GCEL) and the Global Oil and Gas Exit List (GOGEL) to identify companies posing the greatest systemic risks.
This novel approach aims to focus investor attention on “edge cases” – companies nearing alignment or moving away from it – with the hypothesis that the potential for (re-)inclusion will act as a powerful lever for behavioural change, a concept supported by academic literature in equity markets but novel in debt market indices.
Collaboration and future impact
The development of this index has been a collaborative effort involving close consultation with leading global asset owners such as the California State Teachers Retirement System (CalSTRS), Universities Superannuation Scheme (USS), Swiss Federal Pension Fund PUBLICA, and the United Nations Joint Staff Pension Fund (UNJSPF). These institutions provided invaluable input and technical market expertise.
Notably, the United Nations Joint Staff Pension Fund will be among the initial investors utilising the index upon its launch later this year.
University of Cambridge Chief Financial Officer Anthony Odgers emphasised the significance of the project, stating, “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.” He also announced Cambridge’s intention to invest some of its own funds against products referencing the index, aligning its fixed-income holdings with its institutional climate objectives.
Pedro Guazo, the Secretary-General’s representative for the investment of UNJSPF assets, echoed this sentiment, stating, “Finally, large asset owners around the world have an index for this market that aims to discourage the expansion of fossil fuels.”
This pioneering bond index represents a crucial step towards creating financial tools that actively drive the transition to a low-carbon economy. By focusing on the debt markets and employing a dynamic, rules-based engagement strategy, the University of Cambridge and its partners aim to provide asset owners with a powerful instrument to align their investments with their climate goals and curb fossil fuel expansion. The impact of this “systems demonstrator” will be closely watched as it launches and begins to operate in the global financial landscape.
