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Three newly listed equity ETFs seek greenhouse gas reductions

Sustainable ETFs listed in June 2022 that invest in companies seeking to reduce CO2 emissions Fund Name/Symbol ER Assets ($M) Structure Sustainable Investing Approach Nuveen Global Net Zero Transition ETF (NTZG) 0.55% 5.0 Actively managed.  Equities of any market capitalization anywhere in the world, including emerging markets. Fund focuses on the equity securities of companies…

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The Bottom Line:  Three new ETFs listed in June 2022 seeking to reduce greenhouse gas emissions should be evaluated based on financial and non-financial outcomes.

Sustainable ETFs listed in June 2022 that invest in companies seeking to reduce CO2 emissions

Fund Name/Symbol

 

ER

Assets ($M)

 

Structure

 

Sustainable Investing Approach

Nuveen Global Net Zero Transition ETF (NTZG)

0.55%

5.0

Actively managed.  Equities of any market capitalization anywhere in the world, including emerging markets.  

Fund focuses on the equity securities of companies that will have a positive impact on the carbon economy through their current and/or planned efforts to reduce global greenhouse gas emissions which, in turn, will contribute to the overall transition to a net zero economy.  

The fund’s adviser will engage with companies to expedite their transition to net zero carbon emissions.  

V-Shares MSCI World ESG Materiality and Carbon Transition ETF (UDI)

0.39%

2.3

Passively managed/MSCI World ESG Materiality and Carbon Transition Select Index.  Equity securities of companies in the developed markets.  

The underlying securities are intended to represent the performance of companies which are assessed to be sector leaders based on a set of relevant key issues scores that are aligned with SASB’s Materiality Map.  The index excludes companies involved in controversial weapons, tobacco-related businesses, thermal coal mining, thermal coal power generation and unconventional oil and gas. Also, it excludes companies that fail to comply with the United Nations Global Compact Principles and companies with Low Carbon Transition (LCT) category of Asset Stranding.

Xtrackers Net Zero Pathway Paris Aligned US Equity ETF (USNZ)

0.10%

49.6

Passively managed/Solactive ISS ESG United States Net Zero Pathway Enhanced Index.  Large and mid-cap companies. 

The underlying securities are selected in such a manner that the resulting benchmark portfolio’s GHG emissions are aligned with the long-term global warming target of the Paris Climate Agreement, including only companies operating in accordance with market standards for responsible business conduct (Norms-Based Research) and controversial weapons. Those standards are based on established norms such as the United Nations Global Compact and the exclusion of significant involvement in defined sectors. In addition, certain activities are excluded from the index based on fixed revenue thresholds.

Note of Explanation:  ER=Expense ratio.  Data sources:  Fund prospectus, Sustainable Research and Analysis LLC.

Observations:

  • Six new sustainable funds with total net assets of $73.1 million were launched in June 2022¹, including one municipal bond fund introduced by Fidelity Investments and five new ETFs.  
  • Of the six new sustainable mutual funds and ETFs, three new funds, all ETFs, offer investors additional stock-oriented opportunities to invest in companies that are either leading in the transition to low carbon emissions, are expected to have a positive impact on the carbon economy or are aligned with the long-term global warming target of the Paris Climate Agreement to reduce global warming to well below 2℃ compared to pre-industrial levels.
  • Two ETFs are index tracking funds offered at expense ratios ranging from 10 bps to 39 bps that employ detailed positive and exclusionary screening rules the results of which will only be clarified over time as the indices are newly launched and historical results are calculated via back-testing. While back-tested results show positive intermediate-term spreads, that’s not the case more recently.  Short-term year-to-date total returns relative to tracking indices are lagging in both cases. The third fund, an actively managed ETF offered at an expense ratio of 55 bps, is yet to establish a performance track record.   
  • In addition to evaluating climate outcomes by means of disclosures that should be provided by fund firms (and mandated for ESG Impact Funds by recently proposed SEC disclosure requirements, once these are adopted), investors should evaluate fund results relative to the underlying index, in the case of index tracking funds, and also against the performance of an appropriately selected conventional benchmark².  In the meantime, DWS reports in its prospectus that the fund “does not intend to report retrospectively if the portfolio, as selected at each prior rebalance, met the carbon intensity reduction targets.”

¹Excluding new/additional share class additions. ²Conventional benchmarks for each of the index tracking funds are: UDI-MSCI World Index, and USNZ-Solactive GBS Unites States Large and Mid-Cap Index or equivalent.  A conventional index candidate for the actively managed NTZG is the MSCI All Country World Index.

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