Green Contracts Could Mean Green for This ETF | ETF Trends

These days, the investment landscape is awash in green talk, some of it credible, some of it not so much. And while there’s plenty of chatter about greenwashing — rightfully so — there are other emerging green opportunities for investors.

Consider green contracts. In simple terms, a green contract is awarded to a company to perform a green or environmentally friendly service or related project. Some exchange traded funds have leverage to the green contract theme, including the SPDR MSCI USA Climate Paris Aligned ETF (NZUS).

“Green public procurement is a process whereby public authorities procure goods, services, and works with a reduced environmental impact throughout their lifecycle. Green tenders represent the award of works/services based on green tender specifications in addition to traditional supplier selection criteria such as price and technical requirement,” wrote product director Martin Tsanov in a post for FactSet.

While green contracts aren’t yet generating the same buzz as other green concepts, NZUS, which tracks the MSCI USA Climate Paris Aligned Index, is relevant in this conversation for a critical reason. Research conducted by Penn State University and TenderAlpha confirms that public companies that win green contracts deliver for investors.

“In a study conducted by Penn State University and TenderAlpha, companies awarded green public contracts show a significant excess return when tested in a three-day event study analysis using market-adjusted cumulative average returns (CARs),” noted Tsanov.

The study indicates that companies that win green contracts handily outperform competitors that miss out on those accords. Importantly, the research indicates this is the case using a variety of metrics.

“This result appears to be robust when using both CARs, buy-and-hold average returns (BHARs), and various benchmark models for estimating returns. For example, using market-adjusted CARs, the average green contract award sees a significant 5.6% stock price response,” added Tsanov.

Home to 297 stocks, NZUS has some credible components when it comes to green contracts. That group potentially includes Tesla (NASDAQ:TSLA), Cummins (NYSE:CMI), and Honeywell (NASDAQ:HON), among others.

For investors considering NZUS today, the potentially positive attribute is that the concept of green contracts is still in its early innings, meaning that as the niche grows, so could opportunities for the fund’s components.

“While the evidence from this study is still preliminary, it appears to show that green contract awards are associated with a significant positive market response. We believe that this investment signal will remain strong over time. As more ‘green’ tenders are procured, it is reasonable to expect that the scope of companies will also widen,” concluded Tsanov.

For more news, information, and strategy, 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.