Flexibility, Versatility Essential in Climate Change Investing | ETF Trends

It’s reasonable to expect that in 2023, climate-driven and sustainability-focused investment strategies, including exchange traded funds, will receive plenty of attention. That could bring fresh focus to ETFs such as the SPDR MSCI USA Climate Paris Aligned ETF (NZUS) and the SPDR MSCI ACWI Climate Paris Aligned ETF (NZAC), both of which track Paris-aligned benchmarks, making the funds pertinent to climate investing considerations.

And while NZAC and NZUS are passive ETFs, they feature the flexibility and versatility necessary to help investors against a backdrop of rapidly evolving climate investing styles. Those could prove to be important traits as soon as this year.

“The problem with the climate change problem is that we need to do better with both the hazard and outrage components. In many cases, the objective measures of hazards are understood by all parties (e.g., the impact of smoking on mortality rates). This is not the case for climate change,” according to FactSet research.

The research firm highlights two marquee points. First, market participants shouldn’t be relying on historical data when it comes to climate investing because the concept is new and because markets themselves haven’t dealt with climate change until recently.

Secondly, scenario analysis is limited in its utility because when it comes to the climate, it generates near-term results without adequate focus on the long-term effects of climate change.

“According to the 2021 article, ‘Entrenched risk-management practices will yield to climate trends,’ (He and Leatherman 2021) the industry needs to evolve to make better use of projections. This involves replacing historical price changes, and assumptions of stability, with views appropriate to the investment horizon and are not static over time. (i.e., Scenario Analysis with multi-period (time-varying) inputs),” added FactSet.

As for how NZAC and NZUS fit into the equation, despite being less than a year old, the ETFs are examples of methodology mattering when it comes to developing relevant climate-driven strategies. That is to say, “Paris-aligned” is about much more than branding and marketing.

The ETFs’ benchmarks are “designed to reduce exposure to the physical and transition risks of climate change and increase target exposure to sustainable investment opportunities by incorporating the recommendations of the Taskforce on Climate Related Financial Disclosures (TCFD) and minimum requirements of the EU Paris Aligned Benchmark,” according to State Street Global Advisors (SSGA).

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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.