ESG Risks Point to Opportunity with Climate ETFs | ETF Trends

Investors have long been gravitating to the benefits of environmental, social, and governance (ESG) principals, and more companies are making ESG a top priority. While those encouraging factors, there’s still ample ESG risk that needs to be addressed.

From a capital markets perspective, investors can capitalize on corporate and government efforts to combat climate change and reduce ESG risk with various exchange traded funds, including the SPDR MSCI ACWI Climate Paris Aligned ETF (NZAC).

NZAC follows the MSCI ACWI Climate Paris Aligned Index, making it a viable option for climate-aware investors who are looking for avenues with which to pare ESG risk. Additionally, NZAC’s broad-based portfolio could prove ideal for investors looking for an option to contend with the long-term effects of 2022 problems such as inflation, geopolitical upheaval, and climate woes.

NZAC is also relevant because data confirms there’s much work to be done in terms of companies becoming compliant with Paris-aligned objectives.

“According to MSCI, of the 9,238 constituents in the MSCI ACWI Investable Market Index as of October 2022, 36 per cent (3,306) gave set climate targets. Of these, 715 companies have set targets aligned with the Paris Agreement and approved by the Science-Based Targets initiative (SBTi), while just 45 have set net-zero emissions targets for 2050 or earlier under the SBTi corporate net-zero standard, one of the most rigorous net-zero standards across industries,” notes the index provider.

Another issue to consider is that many governments around the world are drumming up fresh climate regulations with which cities and corporations must comply. That could positively affect some NZAC components, which are smoothing climate transitions for a variety of entities.

“Regulatory measures are set to strengthen for other climate change considerations, including the introduction of deforestation-free market-access rules by the European Union, potentially mandatory requirements to report on Principle Adverse Impact indicators, such as greenhouse gas (GHG) emissions and toxic waste, as well as requirements for financial institutions to conduct climate stress tests,” adds MSCI.

Home to 912 stocks, NZAC is a relevant 2023 idea beyond its climate leanings, and that’s the case for multiple reasons. First, as is the case with many ESG ETFs, NZAC has ample growth equity exposure, positioning it for a rebound in that segment should Treasury yields decline. Second, NZAC allocates more than 40% of its weight to non-US stocks, many of which hail from markets that trade at notable discounts to domestic equity benchmarks.

For more news, information, and analysis, visit the ESG Channel.

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.