The emerging companies focused on carbon reduction may be at the sweet spot of global trends, and investors can turn to an exchange traded fund strategy to ride this ongoing trend.
In the recent webcast, Emerging Markets, ESG and Climate Change: One Simple Solution, Michael Lewis, head of ESG research at DWS, argued that achieving net zero carbon emissions will require several catalysts, including decarbonizing key industrial processes, higher carbon prices, protecting and restoring natural capital, and large “negative” emissions or pulling CO2 out of the atmosphere. Carbon capture will therefore be a critical mechanism to meet net zero targets
As investors look to this growing field, it’s been noted that the current investment frameworks are excessively skewed towards addressing sustainability issues from a risk management perspective, Lewis said. But a new “third generation” of responsible investors is beginning to measure, account, and integrate the real world sustainability impact of their investment decisions.
Jennifer Nerlich, vice president of strategic initiatives at Solactive, pointed to the Paris Agreement as a major step toward change, with a long-term goal of limiting global temperature increases to below 2 degrees Celsius. However, world governments will have to do more to achieve the Paris Agreement goals, as current policies are putting the world on a trajectory of warming by 2.7 to 3.1 degrees by 2100.
As a way for investors to track this new shift in global priorities, Solactive has come out with the Solactive GBS Emerging Markets Large and Mid Cap Index, which excludes ESG risks like exposure to crude energy, incentivizes climate improvement through promoting science-based targets or overweighting carbon leaders, and focuses on decarbonization. The resulting index can help provide measurable improvement of climate metrics while maintaining benchmark characteristics of emerging markets exposure.
Amanda Rebello, head of passive sales, U.S., at DWS, underscored DWS’s commitment to responsible investing with the expansion of its investment suite with the inclusion of the latest offering, the Xtrackers Emerging Markets Carbon Reduction and Climate Improvers ETF (EMCR), which tracks the Solactive ISS Emerging Markets Carbon Reduction & Climate Improvers Index.
The underlying index is also weighted in a manner seeking to align its constituent companies’ greenhouse gas emissions with the long-term global warming target of the Paris Climate Agreement, according to the fund prospectus.
The fund can help bring a positive impact. According to DWS, fund holdings generated 135% more renewable energy than the MSCI Emerging Markets Index. Boards in fund holdings were 1.2% more diversified than the EM benchmark as well.
EMCR limits its exposure to controversial activities. For example, fund holdings had 0% exposure to the tobacco industry, 0% exposure to controversial weapons, and 0% exposure to significant coal producers and processors.
The ETF also aims to combat the adverse effects of climate change. Fund holdings produced 55% less carbon emissions than MSCI EM Index, and holdings produced 323 fewer tons of carbon dioxide compared to the referenced benchmark.
Financial advisors who are interested in learning more about ESG investments can watch the webcast here on demand.