Funds Group: First Trust Funds
Management Company: (1-3) First Trust Advisors L.P. (4) First Trust Advisors L.P.; Sub-adviser: Energy Income Partners, LLC,
Funds Affected: (1) First Trust Global Wind Energy Index ETF, (2) First Trust NASDAQ Clean Edge Green Energy ETF, (3) First Trust NASDAQ Clean Edge Smart Grid Infrastructure ETF, (4) First Trust EIP Carbon Impact ETF
Principal Sustainable Investment Strategy: Thematic/impact investing
Summary:
(1) The fund seeks to replicate the investment performance results of the ISE Clean Edge Global Wind Energy Index. The index tracks a universe of companies that are identified as providing goods and services exclusively to the wind energy industry and are given an aggregate weight of 66.67% of the index. Those companies determined to be significant participants in the wind energy industry despite not being exclusive to such industry are given an aggregate weight of 33.33% of the index. This weighting is intended to ensure that companies that are exclusive to the wind energy industry, which generally have smaller market capitalizations relative to their multi-industry counterparts, are adequately represented in the index. The component company must be actively engaged in some aspect of the wind energy industry such as the development or management of a wind farm, the production or distribution of electricity generated by wind power, involvement in the design, manufacture or distribution of machinery or materials designed specifically for the wind energy industry.
(2) The fund seeks to replicate the investment performance results of the First Trust NASDAQ lean Edge Green Energy Index that is designed to track the performance of clean energy companies that are publicly traded in the United States and includes companies engaged in manufacturing, development, distribution and installation of emerging clean-energy technologies including, but not limited to, solar photovoltaics, biofuels and advanced batteries.
(3) The funds seeks to replicate the investment performance results of the NASDAQ OMX Clean Edge Smart Grid Infrastructure Index. The index is designed to track the performance of common stocks in the grid and electric energy infrastructure sector. The index includes companies that are primarily engaged and involved in electric grid, electric meters and devices, networks, energy storage and management, and enabling software used by the smart grid infrastructure sector.
(4) The fund invests at least 80% of its net assets (including investment borrowings) in the equity securities of companies identified by Energy Income Partners, LLC as having or seeking to have a positive carbon impact. Positive carbon impact has been defined to include companies that reduce, have a publicly available plan to reduce, or enable the reduction of carbon and other greenhouse gas (“GHG”) emissions from the production, transportation, conversion, storage and use of energy. The companies in which the fund invests will have demonstrated a commitment to positive carbon impact activities, as determined by the sub-adviser based on its fundamental research and review of public documents, such as regulatory filings and investor and public communications. Examples of positive carbon impact activities include investing capital in activities and technologies with lower GHG emissions, such as wind and solar power generation, or by replacing coal fired power generation facilities with natural gas power generation facilities. In addition, natural gas pipeline companies that supply natural gas power generation facilities have a positive carbon impact by enabling the use of wind and solar power because natural gas power generation facilities serve to back-up and compensate for the intermittent availability of wind and solar power. Other examples of companies having a positive carbon impact include those making investments to reduce methane leaks from the processing, transport and distribution of natural gas, investments in the capture, transportation and sequestration of carbon dioxide or investments in grid-level battery storage or fuel cells.
The sub-adviser conducts the following four-step process when selecting investments for the Fund:
1. Define a universe of potential investments from companies operating in the following industries, including but not limited to: utilities; natural gas pipelines; manufacturers, contracted developers and/or owners of renewable energy; and other companies that operate and/or provide services in support of activities such as renewable energy equipment, energy storage, carbon capture and sequestration, fugitive methane abatement and energy transmission and distribution equipment. These companies may exhibit a higher than average payout ratio supported by stable cash flows derived from long-term contracts, a regulated cost-of-service pricing scheme with inflation adjustments or cost pass-through protections.
2. Eliminate companies that in the sub-adviser’s view have no plans to reduce emissions and have a strategic commitment to any of the following activities that (individually, and not collectively) constitutes more than a de minimis amount of annual enterprise-wide earnings before interests, taxes, depreciation and amortization (“EBITDA”):
a. coal production;
b. crude oil exploration and production; or
c. transportation, storage or delivery of crude oil.
3. Identify among the remaining companies those that, in the sub-adviser’s view, currently or plan to:
a. reduce carbon and other GHG emissions within their own operations;
b. facilitate reduction of carbon and other GHG emissions across the broader market, such as through the displacement of more carbon-intensive fuels such as coal or oil; or
c. facilitate the increased use of renewable resources across the broader market such as by balancing the variable production of wind and solar power with fully available natural gas generated power or through the storage of electricity.
4. The sub-adviser then selects securities for the fund’s portfolio from the remaining eligible securities based upon its holistic assessment of both quantitative and qualitative attributes associated with the remaining securities.