ESG funds are sweeping up investor interest and their money so far this year as increasingly more funds launch that target the space in more interesting and nuanced ways. At this point last year, roughly nine ESG funds had launched; 2022 has seen approximately 20 ESG-centric funds launched and an influx of flows into these sustainably minded ETFs, reports Bloomberg.
At a time when markets remain frothy and fear drives volatility, funds focused on emissions reductions, sustainability, and the energy transition are an attractive buy-in for investors. It’s an upwardly mobile space that is punching above its weight as far as the amount of new cash that ESG fund launches are garnering.
Funds that focus on investing with a sustainability focus, whether it’s through an environmental, social, or governance lens, make up about 4% of the ETF market worldwide in terms of assets. Of the $10 trillion within the ETF marketplace, approximately $25 billion is allocated to ESG-themed funds, representing 8% of total inflows.
“Despite a shifting economic environment, investors are gaining comfort in investing with an ESG lens in 2022,” Todd Rosenbluth, head of research at ETF Trends, told Bloomberg. “Asset managers are rounding out their ESG suite of products to provide investors with more tools to build broadly diversified ETF portfolios.”
A recent survey by Brown Brothers Harriman found that nearly 85% of ETF investors have intentions of including ESG funds in their portfolios for the sake of exposure or increasing their allocations.
New ESG ETFs launching in 2022 have brought in greater than $1 billion in flows in the U.S. according to Bloomberg data, and include a variety of approaches that take a longer-term stance on the carbon transition of industries.
“The next evolution is not necessarily to filter out companies based on where they stand now, but think about what companies are committed to doing in the future,” said James Maund, head of capital markets at KraneShares.
Investing in Industry Leaders in the Carbon Transition
There has been a bevy of funds that have sprung up around the transition to a net-zero emissions way of life, with strategies ranging from carbon credits investing to divesting from the worst offenders, but KraneShares has taken a unique approach in the latest fund added to its climate suite, the KraneShares Global Carbon Transformation ETF (KGHG).
The fund, which launched last month, 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 that are on the precipice of transitioning to renewable technologies. 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 in sectors in carbon emissions reducers that are taking active steps to reduce their own carbon footprints 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 others that are materially reducing carbon emissions.
The fund utilizes proprietary, fundamental, bottom-up analysis using information disclosed by companies and third-party data. Companies invested in include Reliance Industries Limited, an Indian conglomerate energy company, at 3.55%; Fortescue Metals, an Australian iron ore company, at 3.46%; and Contact Energy, a New Zealand electrical and natural gas company, at 3.37%.
KGHG carries an expense ratio of 0.89%.
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