Climate change risks are gaining increasing attention from investors, financial institutions and asset managers. The latest example of how devastating climate change risks can be is the Australian bushfires. The fires have claimed 25 human lives, burnt down over 12 million acres and wiped out around one billion animals.
It is being rapidly acknowledged by officials that climate change risks can have huge detrimental impacts on financial markets. In this regard, the president of the Federal Reserve Bank of San Francisco has commented that “higher sea levels, heavier rainfalls, dryer conditions, and the associated fallout can cause catastrophic losses to property and casualty insurers.” In fact, the governor of the Bank of England and former chairman of the G20’s Financial Stability Board, Mark Carney, is urging corporations to measure, publish and tackle climate risks by conducting stress tests (read: Best Thematic ETFs for 2020).
Certain M&A deals are also highlighting the increased focus on climate change risk assessment. In October 2019, MSCI Inc.’s subsidiary MSCI Barra (Suisse) Sàrl completed the acquisition of Zurich-based environmental fintech and data analytics firm specializing in climate change scenario analysis, Carbon Delta AG in order to expand MSCI’s climate risk assessment capabilities. Moreover, in November 2019, S&P Global made the move to acquire the ESG Ratings Business from RobecoSAM.
The world’s largest asset manager, BlackRock has joined more than 370 global investors in the Climate Action 100+ initiative. This initiative with more than $41 trillion in total assets under management targets to urge companies varying from fossil-fuel producers to consumer-product conglomerates to become carbon-neutral by 2050. In fact, the companies that finance fossil fuel producers are increasingly coming under the radar along with those related to oil, gas and mining industries.
Funds Focused on Climate Change
In 2020, climate change risks will be a mainstream discussion for building portfolios as it can be more expensive to ignore then to face them (per a Financial Times article). Therefore, to gain from this trend of considering climate change while building portfolio, investors can focus on alternative energy funds and/or environmental, social and governance (ESG) investing strategy.
Marked by continued technological advancement and digital revolution, there has been growing awareness about ESG among companies. Moreover, investors appear to be bothered about the future of the environment and the effect it might have on their portfolios. This is because ignorance of environmental issues by companies may result in lawsuits, fines and damages, per the source.
Going by a 2018 survey conducted by Morgan Stanley, around 75% asset managers confirmed the adaptation of sustainable investing by their firms. This figure is up 10% from 2016 levels. In fact, the sustainable funds’ ETF gamut in 2018 gained more than $2 billion in net flows. Moreover, between 2016 and 2018, around 52 ESG ETFs were launched in the United States.
Below we discuss a few ETFs that seek to provide exposure to ESG investing:
Xtrackers MSCI USA ESG Leaders Equity ETF USSG
The fund tracks the investment results that correspond generally to the performance of the MSCI USA ESG Leaders Index. The fund has an AUM of $1.72 billion. It charges 10 bps in fees (read: 9 Successful New ETFs of 2019).
Vanguard ESG U.S. Stock ETF ESGV
The fund tracks the performance of the FTSE US All Cap Choice Index comprising large, mid, and small-capitalization stocks. The fund has an AUM of $939.6 million. It charges 12 bps in fees (read: Are ESG ETFs the Right Choice for 2020?).
iShares ESG MSCI USA ETF ESGU
The fund seeks similar risk and return to the MSCI USA Extended ESG Focus Index while achieving a more sustainable outcome. The fund has an AUM of $1.49 billion. It charges 15 bps in fees (read: 6 ESG ETFs Close to or Above the $1B Asset Mark).
Nuveen ESG Large-Cap Growth ETF NULG
The underlying TIAA ESG USA Large-Cap Growth Index comprises large-cap equity securities and meet ESG criteria and exhibit overall growth style characteristics based on long-term forward EPS growth rate, short-term forward EPS growth rate, current internal growth rate, long-term historical EPS growth trend & long-term historical sales per share growth trend. The fund has an AUM of $115.1 million. It charges 35 bps in fees.
Meanwhile, alternative energy includes any energy source that acts as a replacement to conventional and non-renewable fossil fuel. Going by an International Energy Agency (IEA) report, worldwide supplies of renewable electricity are estimated to expand 50% within five years. Moreover, according to the IEA, renewable energy sources are anticipated to make up 30% of the world’s electricity by 2024 in comparison to the current 26%. Per Allied Market Research, the global renewable energy market is expected to reach a value of around $1.51 billion, at a CAGR of 6.1% between 2018 and 2025. Thus, investors can take a look at the following ETFs:
Invesco Solar ETF TAN
The fund is based on the MAC Global Solar Energy Index which is comprised of companies in the solar energy industry. The fund’s AUM is $475.8 million and the expense ratio is 0.70% (read: Best & Worst ETF Zones of 2019).
iShares Global Clean Energy ETF ICLN
The fund provides exposure to companies that produce energy from solar, wind, and other renewable sources and tracks the S&P Global Clean Energy Index. The fund’s AUM is $451.2 million and the expense ratio is 0.46%.
Invesco WilderHill Clean Energy ETF PBW
The fund is based on the WilderHill Clean Energy Index. It has an AUM of $239.3 million and charges an expense ratio of 0.70% (read: 9 ETFs at the Forefront of 2019 Market Rally).
Invesco Cleantech ETF PZD
It is based on the Cleantech Index. The fund’s AUM is $231.5 million and the expense ratio is 0.67% (read: Top ETF Areas for 2020).
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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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