. The “E” stands for environmental, social, and governance investing. This has always attracted the most attention. This year’s fund launches have been no different.
Asset managers opened 24 funds in the first quarter, including 15 exchange traded funds, with sustainable mandates, according to Morningstar data. A fifth of these funds are focused on climate action.
Alyssa Stankiewicz is an ESG research analyst at Morningstar. She says that there has been strong interest in such funds, as the financial sector coalesces around climate. That includes the Net Zero Asset Managers Initiative, an international group that’s committed to the goal of net zero greenhouse gas emissions by 2050, spurred in part by 2021’s United Nations Climate Change Conference, or COP26.
. Although the strategies of environment-focused ETFs are changing, they are still very different. Morningstar last month outlined five types climate-fund strategies. These include low-carbon and climate conscious funds that tend to reduce climate-related portfolio risk and invest in companies that are supportive of the transition to a low carbon economy.
The three other strategies, green bond, climate solutions, and clean energy/tech fund, target companies whose products or services directly or indirectly address climate issues and opportunities.
From ‘low carbon’ and ‘clean tech’ to ‘climate’
A number of the new ESG funds launched in the first quarter use the word “climate” in their names, including the $546 million passively managed iShares Paris-Aligned Climate MSCI USA ETF
and the $80.6 million actively managed Engine No. 1 Transform Climate ETF
Now in the current quarter, more climate-named ETFs have launched, including the $137 million passive SPDR MSCI USA Climate Paris Aligned ETF
The $4.8 million passive FlexShares ESG and Climate Emerging Markets Core Index Fund
*Is “climate”, the buzzword of this year, just like “low carbon” and “clean tech” in years past, “climate”? State Street Global Advisors changed April’s SPDR ACWI Low Carbon Target ETF into the SPDR ACWI Climate Paris Aligned TF.
State Street released a statement explaining that the change was made to help investors “reduce their exposure to climate-related risks and pursue opportunities arising out of the transition to a low-carbon economy in accordance with the Paris Agreement requirements
.” Using the term “climate”, may help a fund stand apart in a field full of similar funds. Including the first-quarter launches, Morningstar says there are now 555 sustainable open-end mutual funds and ETFs. Given the recent demand, I believe it’s reasonable to expect that asset managers will be trying to capture that demand.” Stankiewicz from Morningstar says. “However, I will say that funds that put it in the in the title should expect greater scrutiny from investors and higher expectations … especially as regulatory bodies turn greater attention to the space.”
Digging into the new funds
The two most similar funds are the iShares Paris Aligned Climate ETF and SPDR MSCI USA Climate Paris Aligned, both of which use similar indexes, MSCI USA Climate Paris Aligned Index and the MSCI USA Climate Paris Aligned Benchmark Extended Select Index. These funds are smaller versions of the MSCI USA parent index and include a mix of large-cap and mid-cap companies.
*The strategies of both funds are slightly different, but they all aim to be in line with the Paris Agreement on Climate Change to limit global warming to well below 2 degrees Celsius. Both funds are 0. 10% annually, and the ETF Research Center’s fund overlap tool shows their holdings overlap 86% by weighting.
The top 10 holdings are similar, including No. 1 Apple, No. 2 Microsoft, at 8.2% and 6.3% respectively. That is a heavier weighting than the parent index’s, MSCI USA Index, and the SPDR S&P 500 Trust ETF’s
Overall the two funds have six of the same top 10 holdings as the S&P 500 Index
and seven of the same top 10 holdings of the MSCI USA Index. These two funds are more heavily weighed in technology and real estate than the large blend category. This is causing them to trail their peers.
. Are the new funds identical to older ESG funds, but with a different name? It doesn’t seem so.
Comparing the new iShares fund with the largest ESG fund by assets, the $22.7 billion iShares ESG Aware MSCI USA ETF
BlackRock U.S., a $1.1 billion climate-focused fund, is another. Carbon Transition Readiness ETF
The overlap between the ETFs is slightly higher for half of the new funds than the existing ETFs due to weighting.
The top 10 holdings are similar with all of the funds, but the ETF Research Center’s fund-overlap tool shows the iShares climate fund’s holdings overlap by 59% compared to the iShares ESG Aware fund. For the iShares climate fund and the BlackRock fund, the overlap is 55%.
. Many of the new climate-focused ETFs have an active management, making comparisons with passive indexes unfair. This option is available to investors who are willing and able to pay higher fees for something other than the market-cap indexes. Engine No. 1. Transform Climate ETF costs 0. 75% and is considered a large value fund by Morningstar. Its holdings are vastly different from the new iShares climate fund, with only 3% overlap, according to the ETF Research Center. The fund managers believe that it will benefit from the energy transition by owning companies such as No. General Motors is the No. 1 holding
and No. No. 9 holding Shell
. Stankiewicz believes active funds are more likely to engage directly with portfolio companies regarding sustainable business practices. These portfolios tend to be more concentrated than passive index funds.
How do you know what fund is right for yo