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Investment in commodities is often intrinsically linked to strong inflation, supply chain disruption, market volatility, and geopolitical tensions. And while environmental and social issues are widely considered when investing in equities and bonds, the same is not typically the case with commodities. A lack of E&S-focused products in the commodities sphere means it has been difficult for investors to gain exposure to this asset class while taking these issues into consideration.

Although the extraction and production of commodities can be associated with environmental and social harms – ranging from deforestation and habitat destruction to hazardous working conditions – vital renewable technologies are heavily reliant on raw materials like lithium, copper and aluminum. It is therefore important to balance both sides of the moral ledger, acknowledging the dual reality at play.

Recognizing the growing focus on E&S factors, as well as ongoing interest in commodity investing, we launched the CMCI Future Commodity, which is based on the ÃÛ¶¹ÊÓƵ CMCI (Constant Maturity Commodity Index). The CMCI has provided an enhanced beta exposure to global commodity markets for over 15 years. The CMCI Future Commodity builds on this experience in order to provide a liquid benchmark.

It incorporates a proprietary scoring from rfu research, a leading sustainable investment consultant (see the box, below). This provides a full value-chain framework for measuring the ecological and social ratings in the CMCI, allowing us to adjust the weight of the underlying commodities in accordance with their ES profiles.

There are also opportunities for investors to drive positive change in the sector. From an environmental standpoint, risks include exacerbation of climate change through carbon emissions, other types of pollution, as well as harms related to land use (such as loss of biodiversity and the destruction of ecosystems). In social terms, commodity production in developing markets, in particular, is often linked to low employment standards and even human-rights abuses and corruption.

There is considerable scope for investors and other market participants, including end users, to call for the introduction of more sustainable practices that can improve ESG performance. This could involve updating production techniques to make greater use of recycling or organic methods; producers can be encouraged to seek ways to extend commodities’ life cycles, as well as to use their output in sustainable applications such as renewable energy installations. Healthy ecosystem management, biodiversity loss, and land use in general are also key considerations.

In terms of social factors, low employment standards and even human-rights abuses and corruption can be tracked and improved. While far from being guaranteed, commodity production has the potential to be a significant source of wealth for developing nations and therefore could play a role in addressing global income inequality.

Traditional monthly rolling methodology

To help us achieve this, in partnership with rfu research the CMCI Future Commodity incorporates environmental and social criteria into CMCI to improve its portfolio level ecological-social rating over time. We aim to minimize the deviation of this index from the CMCI while also controlling for liquidity and diversification.

Besides its focus on the overall environmental-social profile of the index, the CMCI Future Commodity leverages CMCI's tenor diversification to enhance its transition characteristics. The CMCI weights future tenors across the curve in accordance with a 75% liquidity and 25% equal-weighting rule. For the CMCI Future Commodity, longer-dated tenors are overweighted in comparison to maturity for commodities with a higher weight than the CMCI benchmark. This strategy is designed to increase allocation at the back end of the curve, while also enhancing liquidity for producers.

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