Opinion: ‘Climate’ is the new buzzword in a crop of new ESG funds that were just launched


The “E” in environmental, social and governance investment has always attracted more attention. The new funds launched so far this year are no different.

Asset managers opened 24 funds in the first quarter, including 15 publicly traded funds, with sustainable mandates, according to Morningstar data. One-fifth of these focus on climate action.

Alyssa Stankiewicz, an ESG research analyst at Morningstar, says there has been a lot of interest in these funds as the financial industry unites around climate change. This includes the Net Zero Asset Managers Initiative, an international group committed to the goal of zero net greenhouse gas emissions by 2050, driven in part by the United Nations Conference on Climate Change. 2021, COP26.

Environmentally focused ETFs are evolving towards a greater focus on climate, but strategies are subtly different, he says. Last month, Morningstar outlined five types of climate fund strategies, including low-carbon, climate-conscious funds, which tend to focus on reducing climate-related portfolio risks and investing in companies. which align positively with the transition to a low-carbon portfolio. economy.

The other three strategies (green bonds, climate solutions and clean energy / technology funds) are aimed at companies whose products, services or projects directly or indirectly address climate challenges and opportunities.

Read: Carbon, nuclear and hydrogen capture are included in most zero-net emissions plans and need more investment: report

From “low carbon” and “clean technology” to “climate”

Some of the new ESG funds launched in the first quarter use the word “climate” in their names, including the $ 546 million iShares Paris-Aligned Climate MSCI USA ETF PABU, passively managed,
+ 2.80%,
and the $ 80.6 million actively managed Engine No. 1 Transform Climate ETF NETZ,
+ 4.21%.

Now, in the current quarter, more climate-named ETFs have been launched, including the $ 137 million SPDR MSCI USA Climate Paris Aligned NZUS passive ETF.
+ 2.77%
and the $ 4.8 million FlexShares ESG & Climate Emerging Markets Core Index Fund FEEM
+ 2.70%.

“Climate” is just the buzzword this year, how were “low carbon” or “clean technology” the past few years? In April, State Street Global Advisors changed the SPDR MSCI ACWI Low Carbon Target ETF to SPDR MSCI ACWI Climate Paris Aligned ETF NZAC,
+ 2.61%.
According to a press release, State Street explained that the change was “designed to support investors who seek to reduce their exposure to the transition and the physical risks associated with the climate and who want to seek opportunities arising from the transition to a low-carbon economy in line with the requirements of the Paris Agreement. “

Using the term “climate” can help a background stand out in a crowded field. Including first-quarter releases, Morningstar says there are now 555 sustainable and open-ended mutual funds and ETFs.

“Given the demand we’ve seen in recent years, I think it’s to be expected that asset managers will try to hold on to that demand,” says Stankiewicz of Morningstar. “However, I would say that the funds that put it in the title should expect more scrutiny from investors and higher expectations … especially as regulators pay more attention to space.”

Read: Four ETFs aimed at clean water, wind power, smart grid and one that has them all

Exploring new backgrounds

The two most similar funds are iShares Paris Aligned Climate ETF and SPDR MSCI USA Climate Paris Aligned, both using similar indices, MSCI USA Climate Paris Aligned Index and MSCI USA Climate Paris Aligned Benchmark Extended Select Index. These are smaller versions of the MSCI USA parent index, a combination of large and mid-cap companies.

The funds use slightly different descriptions of the fund’s strategy, but essentially both seek to align with the Paris Agreement on Climate Change to limit the rise in global average temperature well below 2 degrees Celsius. Both funds cost 0.10% annually, and the ETF Research Center’s fund overlay tool shows that their holdings overlap by 86% by weighting.

The top 10 holdings are similar, including Apple No. 1, Microsoft No. 2, around 8.2% and 6.3%, respectively. This is a stronger weighting than the main index, the MSCI USA index and the SPDR of the SPDR S&P 500 Trust ETF,
+ 2.39%.

Overall, the two funds have six of the same 10 major holdings as the S&P 500 SPX Index.
+ 2.39%
and seven of the same 10 major holdings in the MSCI USA Index. These two funds have heavier weights for technology and real estate compared to the large category of combinations, and this technology weighting is also causing these funds to lag behind their peers as well.

Are the new funds the same as the old ESG funds, but simply with a new name? It doesn’t look like that.

Comparing the new iShares fund with the largest asset ESG fund, the $ 22.7 billion iShares ESG Aware MSCI USA ETF ESGU
+ 2.58%
and another major climate-focused fund, the $ 1.1 billion BlackRock US Carbon Transition Readiness ETF LCTU,
+ 2.53%,
shows that just over half of the new funds overlap with the weighted ETFs.

The top 10 holdings are similar across funds, but the ETF Research Center’s fundraising tool shows that iShares climate fund holdings are 59% overlapping compared to the iShares ESG Aware fund. For the iShares climate fund and the BlackRock fund, the overlap is 55%.

Some of the new climate-focused ETFs are being actively managed, making comparisons with a passive index unfair. But for investors who are willing to pay more in commissions and want something different from market capitalization rates, this is an option. Engine no. 1 Transform Climate ETF costs 0.75% and Morningstar considers it a very valuable fund. Its holdings are very different from the new iShares climate fund, with only a 3% overlap, according to the ETF Research Center. He owns companies that fund managers believe will drive and benefit from the energy transition, including General Motors GM’s No. 1 holding company.
+ 7.45%
and number 9 with Shell SHEL,
+ 2.68%.

Stankiewicz says active funds can relate directly to holding companies more easily on sustainable business practices. These portfolios tend to be more concentrated than passive index funds.

How do you know which fund is right for you? As is often the case with ESG funds, they require more due diligence to make sure they align with your beliefs.

Learn more about MarketWatch:

You can count the value-oriented ESG funds on one side. This is painful for investors as technology melts away

“Drill, baby, drill” returns in the middle of the energy crisis, and this puts ESG efforts in the background

If we take these five steps now, we can avoid a climate disaster



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