Climate funds, a burgeoning subsector of the broader environmental, social, and governance (ESG) space, are attracting more assets and attention from investors.
Over time, that should be positive for exchange traded funds such as the SPDR MSCI ACWI Low Carbon Target ETF (LOWC). However, there’s more to the story than just inflows. Investors need to examine catalysts beyond capital flowing into a fund. Fortunately, there are compelling tailwinds supporting the long-term LOWC thesis.
“In its latest report, the Intergovernmental Panel on Climate Change warned that the window of opportunity to take any meaningful climate action is rapidly closing,” according to Morningstar. “Worldwide emissions must fall by half by 2030 and reach net zero by 2050 to have any chance at keeping global temperature rise under 1.5°C.”
LOWC, which follows the MSCI ACWI Low Carbon Target Index, holds 1,654 stocks, providing investors with a deep bench with which to capitalize on long-term climate-related spending trends. Moreover, there are clear reasons why companies and governments need to spend on climate and decarbonization efforts.
“By some estimates, the global economy could shrink by 18% in the next 30 years if no action is taken to mitigate climate change,” adds Morningstar. “Investors’ portfolios are at risk from climate change. Some investments will be disadvantaged in the transition to net zero, while others will find themselves vulnerable to physical risks from extreme events caused by climate change.”
Translation: Climate spending is very much an issue of either spend now or pay later. Many stakeholders are awakening to that scenario, and that could be constructive for LOWC investors, as the fund is home to companies with lower carbon footprints and less fossil fuels exposure relative to the MSCI ACWI Index.
“The introduction of the Sustainable Finance Disclosure Regulation in March ratcheted up the demand for innovative investment strategies incorporating climate considerations. Recent improvements in climate-related data empower asset managers to better understand and interpret the climate profile of companies and countries and, as a result, design strategies that meet clients’ needs and preferences,” concludes Morningstar.
The combination of more standards backstopping climate funds, investor demand for these products, and LOWC’s straightforward approach could prove attractive to long-term investors.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.