Bloomberg Index Services have launched the first family of corporate bond indices that exclude companies involved in or financing the development of fossil fuels. The indices draw on academic research from Cambridge University (1), which highlights the key role that bonds play in financing fossil fuel developers. Indices play a central role in financial markets, and the Bloomberg-Cambridge University Corporate Indices (BCam Indices) meets the important need for indices aligned with the objectives of limiting global warming and managing systemic risks. Their launch serves as a reminder that investors, including asset owners and asset managers, can and must direct capital away from fossil fuel expansion.
The new BCam indices exclude companies in the thermal coal, oil and gas value chains, as well as electric utilities that are expanding their fossil fuel production and usage, using data from the Global Oil and Gas Exit List and Global Coal Exit List compiled by the German NGO, Urgewald. These indices also underweight and exclude banks financing fossil fuel expansion, insurers offering insurance services to the fossil fuel sector, and companies not phasing out sufficiently.
Much-needed indices for climate action, compared to inadequate existing indices
Financial indices play a central role in capital markets, serving as a benchmark for investors to compare the performance of a sector or portfolio against the rest of the market.
The role of indices has grown significantly with the rise of passive investment (2), driven by the boom in exchange-traded funds (ETFs), which track selected indices. As a result, indices have become tools for auto-allocating capital, exerting a considerable influence on the economy.
In this context, 33% of asset owners report facing obstacles in accessing investment grade corporate bond products (indices, benchmarks, funds) that align with their climate strategies (3). In particular, general indices that exclude fossil fuel expansion are few and far between. Even the Climate Transition Benchmark launched by the European Union does not fully exclude companies pursuing fossil fuel expansion.
The new BCam indices therefore meet the needs of investors to manage the climate-related financial risks which portfolios are exposed to over the long term (4). These indices also helps them meet their climate commitments, while offering a risk-return profile similar to that of its parent index.
The indices target a key source of funding for fossil fuel expansion
BCam Indices highlight the significance of bond markets in the development of fossil fuels.
Scientists and the International Energy Agency are clear that any new oil and gas field or any new thermal coal project jeopardises our chances of limiting global warming to 1.5°C (5). Yet 51% of the funding for companies involved in fossil fuel development came from bond issuances in 2023 and 2024 (6). The remainder of the funding comes from bank loans, and to a very small extent from share issuances. To align with a science-based 1.5°C pathway and reduce real-world emissions, investors must therefore immediately cease bond investments in fossil fuel developers.
The indices proposed by Bloomberg and Cambridge University, which exclude companies expanding fossil fuels and companies not phasing out fossil fuels at sufficient rates, as well as the banks and insurers that support them, therefore offer a tool for investors to allocate capital to funds that align with scientific recommendations and the economic reality of fossil fuel expansion financing.
An opportunity for asset owners to take concrete action on climate change
Cambridge University and the UN Joint Staff Pension Fund have already announced that they will invest $750 million to track the BCam indices (7).
In addition to investments tracking the BCam indices, asset owners can adopt other measures to mitigate the climate risks and impacts to which their portfolios are exposed:
- Switch their benchmark fixed income index to the BCam indices or other indices aligned with climate objectives;
- Encourage external asset managers to use such indices – particularly to launch new passive funds – and to cease all new bond investments in fossil fuel developers;
- Encourage index providers to offer more products that exclude companies pursuing and financing the expansion of fossil fuels.
The launch of the indices, as well as Cambridge University research, send a strong signal to the market: bonds play a key role in financing the expansion of the fossil fuel sector, and asset owners now have additional tools at their disposal to avoid contributing to this and to encourage their external asset managers to do the same.
