As climate-based investing becomes a more significant priority for a broader swath of investors, so is clarity and ease of use.
Some exchange traded funds check those boxes. That group includes the SPDR MSCI ACWI Low Carbon Target ETF (LOWC). LOWC is relevant at a time of considerable debate surrounding environmental, social, and governance (ESG) and sustainability investing methodologies.
“According to the IPR’s Required Policy Response – one of many scenarios that project a world on a potential 1.5°C pathway – OECD economies should reach net negative CO2 emissions by 2050 and non-OECD countries should reach net zero,” notes BNP Paribas.
For its part, LOWC is a valid play on global carbon reduction efforts because its holdings are included in the fund on the basis of carbon emissions relative to sales and market capitalization.
LOWC follows the MSCI ACWI Low Carbon Target Index, which is the low-carbon counterpart counterpart to the widely observed MSCI ACWI Index. That's a global benchmark, as confirmed by LOWC's exposure to stocks from more than 40 countries, which is a relevant point because many countries need to up to their carbon reduction efforts.
“Many of the main industrial changes required to reach net zero by 2050 – and keep global temperatures from rising beyond 1.5°C – need to take place in emerging markets such as China and India, where emissions are generally higher. That said, much of the consumption of goods and services related to those emissions occurs in developed economies,” adds BNP Paribas.
Various studies document the notion that companies that could be or have previously been environmental offenders can and do expose investors to undue risk. LOWC attempts to go the opposite direction, and over the long haul, that strategy could potentially pay off for investors in the form of lower volatility and better returns.
“It is important that, out of COP26, there is a drive to bring in investors, companies, cities and civil society as the world works towards significant economic change,” concludes BNP Paribas.
The bank also notes that some high-growth sectors could play pivotal roles in carbon neutrality efforts. On that note, LOWC allocates 42% of its total weight to the technology, consumer cyclical, and communication services sectors.
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