New ESG ETFs Track Carbon Transition Pledges, Seek to Provide 'Grenium' for Investors

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“People are more concerned about investing in good companies and avoiding those engaged in activities harmful to people and the planet,” said AXS Change Finance ESG (CHGX) ETF’s management in marketing literature.

That, of course, is not new.

Climate change awareness has surged in recent years, especially as the 2015 Paris Agreement warned the world it was woefully late in averting a 2-degree Celsius jump in temperatures for this century, potentially triggering catastrophic weather events.

The ESG ETF space has since struggled to raise funds, mainly as it wasn’t particularly profitable or easy to understand for do-good investors. But a younger and more eager generation to save the world is driving “a greater acceptance of ESG as an investment approach,” pushing fund managers to churn up an ever-growing suite of innovative products catering to diverse clients.

“There are more pension funds and broader institutions focused on fighting climate change, giving advisors and investors a chance to build full portfolios covering all investment styles,” said Todd Rosenbluth, who recently took the research helm at ETF Trends, moving from broker CFRA. And as the Russia-Ukraine war pushes oil prices higher, alternative approaches to clean energy investing have also emerged, further boosting the space, he added.

“We are going to see the number of products expand this year,” Rosenbluth said.

Almost 100% Growth

Indeed, sustainable ETFs are so popular that 20 funds have launched so far this year, up from nine during the same period in 2021, and amassing roughly $25 billion of assets. ESG now accounts for 4% of the $1 trillion global ETF market by assets.

“It’s growing twice as fast as traditional ETFs and faster than sustainable mutual fund assets,” confirms Kiley Miller, Director of ESG Investment Solutions at investment manager Envestnet, adding that 2021 saw $7 billion of ESG ETFS, up 94% from 2020.

“There is growing interest from advisors across investment vehicles,” Miller said. “We have 37,000 now engaged in sustainable investing. They are seeing a value proposition, an opportunity for personalization and to attract younger investors. They are also more comfortable with the terminology and the different investment approaches they can match and marry for clients.”

Echoing others, she expects 2022 to be another banner year with many more funds rolling in diverse categories, both as active and passive strategies and targeting new frontiers such as affordable housing, water or social justice. Carbon transition and net-zero emission strategies such as those matching the Paris Agreement will also be key.

Paris Focused

Indeed, some of the funds debuting this year include the iShares Paris-Aligned Climate MSCI USA ETF (PABU), which gathered $600 million as of press time. It tracks a portfolio of large and mid-cap U.S. firms designed to be compatible with the Paris Agreement, cut physical climate risks and seek opportunities emerging from the low-carbon transition, among other things. Some of the fund’s top holdings include Apple (AAPL), Microsoft (MSFT), Amazon (AMZN) and Tesla (TSLA). Like most other ESG funds, the vehicle screens out ‘bad actors’ such as those trading in weapons or tobacco.

While those screens have been key in the past, investors are becoming increasingly interested in backing companies with specific, long-term carbon reduction commitments, according to James Maund, head of capital markets at KraneShares, which runs the new Global Carbon Transformation ETF (KGHG) targeting "high emissions industries on the cusp of the transition away from fossil fuels to renewable technology.”

With $2.5 million in assets and a 0.89% expense ratio, KGHG’s portfolio features several international metals firms and major power utilities including Australian iron ore maker Fortescue Metals (ASX), UK refiner Relianc-GDR (RIGD), Germany’s RWE (RWE) and Italy’s ENEL (ENEL).

“Companies in high impact industries that have a stated commitment and demonstrated action towards decarbonization may see superior growth compared to their peers as well as potentially benefit from a re-evaluation and an improved environmental, social and corporate governance (ESG) score,” KraneShares says in the fund’s prospectus.

Walk the Walk

Furthermore, investors are seeking “criteria and data that identifies companies that are part of the carbon transition and moving toward net zero, not just in comments and targets but in actually doing so, in making meaningful changes in business models to be lower carbon,” Miller added.

The SEC’s new proposed rules requiring firms to disclose extensive climate-related information in their filings is also driving greater transparency and data about these activities, boosting future growth, Miller added.

Buckingham Strategic Wealth’s research director Larry Swedroe expects future growth will remain buoyant, adding that cash inflows have been so large that green-stock valuations have outperformed brown ones, giving ESG stocks a premium or ‘greenium.’

“There have been tens of billions flowing in every month,” he noted. “There are many more funds being created in all sorts of niches, green energy, solar, water and even religion, all to give socially responsible investors a chance to express their values.”

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Ivan Castano

Ivan Castano is a seasoned financial editor, corporate content specialist and journalist with over two decades’ experience writing for leading publications including Bloomberg, Forbes, Barron’s, MarketWatch, Euromoney and FT groups, among many other leading titles. He enjoys writing about the emerging markets, corporate finance, technology and investing.

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