As the world moves toward a net zero climate goal, investors can capitalize on the global shift through a specialized exchange traded fund strategy to target companies poised to benefit the most from the changes.
In the recent webcast, Transitioning to Net Zero: What Investors Need to Know, Kelly Hagg, senior managing director and head of Responsible Investing Strategy and Solutions at Nuveen, explained that “net zero” refers to the elimination or offsetting of carbon emissions, with many countries eying this target by 2050. Meanwhile, transitioning to the low carbon economy will have a transformative impact on many industries.
While still slow going and highly contentious, the net zero goal is slowly being adopted. For example, in the United States, renewable energy legislation now exceeds anti-ESG legislation in quantity and scope. All 50 states provide renewable energy programs, not including the Inflation Reduction Act. Additionally, Texas is among the top five states incentivizing renewable ESG legislation.
Hagg highlighted policy changes in Europe as a kind of roadmap for what we may see in the U.S., which may potentially offer investment opportunities in the ongoing green shift. Nuveen anticipates similar outcomes in the U.S. as additional SEC regulations come online, the DOL changes paths, and the implications of the Inflation Reduction Act become a reality. Specifically, the Inflation Reduction Act passage enables $370 billion for energy and climate investments. Historically, green CAPEX for net zero, infrastructure, and clean water have represented around 15% of a company’s total CAPEX. Looking ahead, each year, between $3.5 and $4.5 trillion needs to be mobilized to achieve the SDGs by 2030.
“We expect significant amounts of capital to be deployed into green strategies,” Hagg said.
For instance, Hagg pointed to strategies linked to the SDGs that could provide a compelling opportunity. Companies that address the world’s most pressing challenges are well-positioned to benefit from rising demand. Specifically, sectors that stand to outperform include battery storage, green hydrogen, energy efficiency, CCUS, renewable energy, EVs, infrastructure, and more.
“RI and ESG strategies with exposure to these segments will likely outperform as the world transitions to a low-carbon economy, with marked support from global governments,” Hagg added.
As a way for investors to target this growing trend, Jordan Farris, managing director of ETF Product Management and Development at Nuveen, highlighted the Nuveen Global Net Zero Transition ETF (NASDAQ: NTZG) to express conviction in the ongoing transition of the global economy toward “net zero” carbon emissions.
NTZG is an actively managed global equity ETF seeking to outperform the MSCI All Country World Index (ACWI) with a focus on carbon emissions reductions. The fund includes a global equity portfolio that seeks favorable long-term total return while directly engaging with portfolio companies in an effort to decarbonize at a rate faster than the broader market such that it achieves “carbon net zero” well ahead of the 2050 Paris Climate Accord deadline.
Farris argued that in addition to policy, active ownership and stewardship are key in limiting warming and reducing GHG in half by 2030. Consequently, companies will have to show a credible net zero plan. The plan should demonstrate reduced carbon emissions over time at a specified pace. Companies with plans will be expected to report carbon emissions to shareholders and steps taken to reduce carbon through business activities or carbon sequestration. Lastly, plans backed by capital expenditure towards activities identified as mitigating climate change provides evidence of authenticity.
“We believe a curated portfolio of holdings across the climate transition spectrum offers the best opportunity to outperform over a market cycle,” Farris said.
Farris noted that NTZG’s underlying investments are classified across leaders, improvers, and influencers styles based upon carbon reduction plans, absolute carbon emissions, carbon intensity, capital expenditures towards activities to mitigate carbon, and the development of technologies that support climate mitigation.
“We believe that investing in companies that are proactively addressing the net zero transition leads to a portfolio that has the potential to outperform the broader market. This is a result of these companies being well positioned for outsized financial productivity in a future state that will be increasingly reliant on renewable, more efficient sources of energy,” Farris said. “Alternatively, we will engage critical companies to accelerate their pathway to a net zero future.”
Financial advisors who are interested in learning more about the transition to net zero and the investment opportunities involved can watch the webcast here on demand.