There is an increasing link between better ESG transparency and practices and a rise in company valuations, underscoring the outsized impacts that poor ESG practices will likely take in the coming years on companies. The KraneShares Global Carbon Transformation ETF (KGHG) invests along this premise by seeking to capture companies that are actively transitioning their emissions practices and are poised to be industry leaders in the carbon transition.
Recent research from Mercereau, Melin, and Lugo published in the Journal of Asset Management found a direct correlation between better ESG practices within eight key areas and improved shareholder valuation.
Image source: Journal of Asset Management
“Enhancing ESG can unlock significant shareholder value. For example, firms adopting top decile practices across all eight variables would boost their equity valuation by 35% on average. Which ESG improvement(s) can boost share price mostly depends on the firms. More than half the gains come from just one or two ESG variables,” wrote the authors.
Their analysis of over 2,000 companies globally from the MSCI All Country World Index included measuring ESG variables that fall under three key pillars: high corporate materiality, high data availability, and high market relevance. Specifically, they looked at carbon emissions, water usage, and waste generation (E); board gender diversity and the promotion rate of women (S); and board tenure, size, and overboarding (G).
The authors measured the P/E ratio (price to 12-month forward earnings) and the P/B (price-to-book) to determine valuations for companies between 2012-2020.
Capturing the Rising Valuations Potential of Transitioning Companies
For investors wanting to ensure that their portfolios are on the right side of that transition and capture the valuation potential in transitioning companies, the KraneShares Global Carbon Transformation ETF (KGHG) is a fund worthy of consideration. KGHG seeks to capture the true potential within the carbon transition by focusing on companies from within industries that are traditionally some of the highest emission offenders but are on the precipice of transitioning to renewable technologies. It goes beyond relying on just a climate pledge and offers exposure to companies making a meaningful transition to renewable energies and away from heavy carbon-emitting practices.
KraneShares believes that the upside potential of investing in these companies as they transition is enormous. These companies that are set to disrupt their industries would benefit greatly from being leaders in the transition, as the cost of carbon emissions will only become more expensive, cutting into the bottom line as demand decreases for high emissions offenders.
KGHG is an actively managed fund that invests globally across market caps and sectors in carbon emissions reducers that are taking active steps to reduce their carbon footprints and services or the carbon footprints of other companies. This also includes companies within the supply chain of the carbon-reducing companies and companies that are growing their businesses with companies that are materially reducing carbon emissions.
The fund utilizes proprietary, fundamental, bottom-up analysis using information disclosed by companies and third-party data.
KGHG carries an expense ratio of 0.89%.
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