"Material Differences" in Portfolio Performance Focus on Climate

ESG remains a contentious topic for the investing world, and often for good reason, given flagging performance and inconsistent frameworks. There is strong opportunity, however, and substantial difference in portfolio performance in the decades to come for investors that align with climate and global decarbonization efforts.

It’s a shift already happening, regardless of ideological beliefs, as significant capital allocations begin to pivot to climate focused initiatives.

Broad-based ESG funds continue to underperform, but it’s not an issue of an unviable strategy so much as the wrong strategy, according to panelists at the Bloomberg’s Sustainable Finance Forum. Institutional investors have largely understood the importance of a targeted approach to ESG’s individual principles versus a broad, inclusive strategy for several years. It’s an approach that has likely been easier, given the amount of data that institutional investors have access to.

It’s also a reality that advisors and investors are waking up to, according to Barbara Mueller, Vice President at Goldman Sachs Asset and Wealth Management, speaking at the Bloomberg panel.

The Inflation Reduction Act: Dedication to Decarbonization

The passage of the Inflation Reduction Act in the U.S. to the tune of $400 billion helps companies transition and builds out infrastructure for a decarbonizing economy. It’s a trend happening globally as well.  Europe committed $300 billion to its own transition, and China spent $500 billion last year to boost its own transition.

“This arms race is going to accelerate this race to decarbonization,” explained Luke Oliver, managing direct and head of climate investment, head of strategy at KraneShares. “Whoever wins this decarbonization will also win the economics of that.”

Such investment and focus on the energy transition away from fossil fuels creates three specific areas of opportunity for investors, according to Oliver. These include being long carbon compliance markets and investing in the companies actively transitioning with the “biggest increase in revaluation”. It also means investing in the raw minerals necessary for the energy transition.

Oliver explained that McKinsey estimates $275 trillion will be spent to decarbonize the global economy by 2050.

“That amount of money is going to move the needle in so many industries, so many companies,” said Oliver. “You have to start positioning your portfolios because there is going to be material differences in performance between those that are not positioned and those that are positioned.”

“It’s Inevitable”: Retail Investors Come Around to Climate

Retail investors are still slow to get on board with much of ESG and climate initiatives. Oliver explained that when KraneShares launched the first ETF that offers exposure to the most liquid global carbon markets, the KraneShares Global Carbon Strategy ETF (KRBN), in 2020, institutional investors were the first and primary investors. “We haven’t even seen the big retail adoption of this yet,” remarked Oliver.

It’s a tide that is likely to change, according to Mueller, particularly as older generations pass on their wealth to younger ones with different values and priorities. It’s a change likely already underway, but “a little bit more under the radar” Mueller mused. “I think it’s inevitable.”

KraneShares’ carbon allowances suite of funds includes KRBN, an ETF that invests in carbon allowances futures globally from the EU, California, RGGI, and the U.K. It also includes the more targeted KraneShares European Carbon Allowance Strategy ETF (KEUA) and the KraneShares California Carbon Allowance Strategy ETF (KCCA).

For a different opportunity in carbon, KraneShares offers the KraneShares Global Carbon Offset Strategy ETF (KSET). It’s the world’s first ETF to provide exposure to the voluntary carbon market. For opportunities in raw materials, there is the KraneShares Electrification Metals Strategy ETF (KMET). The fund invests in six different metals crucial to the energy transition. For an opportunity within equities, the KraneShares Electric Vehicles and Future Mobility ETF (KARS) is strongly positioned to harness the growing demand for EVs.

For more news, information, and analysis, visit the Climate Insights Channel.