July marks the third anniversary of the KLD Global Climate 100 Index (GC100)—the first global index focused on climate change solutions. The success of the GC100, which has outperformed its benchmark (the S&P/Citigroup BMI World) for all three years, is a testament to the strength of its mission and its methodology. (Click here for GC100 performance data.)

The GC100 serves as the basis for a number of investable products, including three mutual funds sponsored by Shinko Investment Trust Management in Japan; a mutual fund from Cominvest Asset Management in Germany; a unit investment trust sponsored by Advisors Asset Management; and several other separate and institutional accounts. Click here for a list of products based on KLD Indexes.

For the GC100, KLD looks for large and small companies that produce and distribute renewable energy like solar and wind power and/or future fuels such as hydrogen and biofuels. Companies committed to developing and applying new technologies to reduce resource consumption and carbon emissions are also candidates.

The GC100 is equal weighted, which means that each constituent accounts for 1 percent of the 100-company index. Each constituent contributes equally to the performance of the index. This gives smaller niche companies more exposure than they would receive in a similar index constructed using market-cap weighting. In that scenario, the weight of each security on the index would be in proportion to its market capitalization.

While the GC100 includes large companies in industries that impact climate change the most, KLD seeks to capture the growth potential and performance of smaller companies as well. An equal weighted index levels the playing field between small- and large-cap companies, rewarding thought and innovation leadership, not just market-cap leadership.

Because the GC100 is equal weighted, it requires more active monitoring than a market-cap weighted index. This presents KLD with unique challenges in maintaining the GC100.

“The GC100’s success in raising assets has required that additional scrutiny be placed on the index’s liquidity characteristics,” said Jed Sturman, manager of the GC100. Equal weighting has a greater impact on liquidity than market-cap weighting, requiring active monitoring of daily trading values for each company on the GC100.

“The liquidity standards that KLD established at the GC100’s launch were revised last fall. We made this adjustment to accommodate both the current asset levels of investable products based on the GC100, and the potential for significant future growth,” added Sturman.

Despite these challenges, the GC100 has shown that an equal weighted index can provide greater returns, not only in relation to the benchmark, but historically as well. To confirm this, KLD built a hypothetical market-cap weighted index that included GC100 constituents, but represented them in proportion to their market capitalization. The actual equal weight GC100 has returned 57 percent (17.23% annualized) since index launch, as of May, 2008. The same constituents under a market-cap weight would have returned only 39 percent (12.54% annualized) during the same period.

“The GC100’s emphasis on innovators, rather than just big players, has paid off for its investors,” Sturman said.