A Socially Responsible ETF Strategy to Build a Better Tomorrow

As investors explore ESG investing trends and the political impact of the growing space, they can look to exchange traded fund strategies to invest in a brighter tomorrow.

In the recent webcast, Investing for a Brighter Tomorrow with ESG ETFs, Andy Blocker, Head of US Government Affairs, Invesco, highlighted the world’s current focus on meeting new goals toward greenhouse gas emissions. For example, during the recent Virtual Leaders Summit on Climate over Earth Day, the United States pledged to reduce emissions by at least 50% by 2030. Meanwhile, China plans to reduce coal consumption starting in 2025 and achieve net-zero CO2 emissions by 2060. India has also entered a new partnership with the U.S. to expand renewable energy.

On the regulatory and legislative side, Sen. Warren (D-MA) and Rep. Casten (D-IL) have reintroduced a climate risk disclosure bill. Treasury Secretary Yellen is pushing global climate disclosures with the SEC and FSOC.

Institutions are also assessing climate-related financial risks. For example, the Federal Retirement Thrift Investment Board will evaluate the risk of continued investment in fossil fuel securities. Major federal suppliers will be required to disclose their greenhouse gas emissions and climate risk, and set science-based targets for reducing them. President Joe Biden is also expected to sign an Executive Order to develop a strategy on climate-related risks for public and private financial assets.

Rene Reyna, Head of Thematic and Specialty Product Strategy ETFs and Indexed Strategies, Invesco, pointed out that over the past year, we’ve seen growing commitments from major economies to reach for carbon neutrality – countries are seeking to be carbon neutral by 2050 in many cases. Combining the EU, China, Japan, and South Korea, 41% of Global GDP and 44% of emissions are now under a net-zero plan.

Consequently, investors may find a growth opportunity in this ongoing global shift, as these climate change targets will require significant investment in renewable energy to drive down carbon emissions.

“Favorable economics and improving fundamentals support longer-term growth prospects for the low carbon renewable energy sector,” Reyna said.

“The rapid pace of innovation continues, and key technologies should continue to spur adoption in renewables,” he added.

For example, past improvements are already making battery integration into renewables projects more viable. Hydrogen will be key to decarbonizing energy intensive sectors like shipping.

As a way to capture this growing opportunity, investors can look to assets like the recently launched Invesco MSCI Green Building ETF (GBLD). With the launch of GBLD, Invesco expands its relationship with MSCI and is the first asset manager in the United States to license the MSCI Global Green Building Index for an ETF.

The Invesco MSCI Green Building ETF tries to reflect the performance of the MSCI Global Green Building Index, a subset of the MSCI Global Environment Index, which includes companies with maximum exposure to the green building theme. This includes companies involved in the design, construction, redevelopment, retrofitting, or third-party certification of green-certified properties to affect climate change mitigation and adaptation. The index is reviewed quarterly, and any changes are implemented on the last business day of February, May, August, and November.

“GBLD will provide robust global exposure. The fund will also have significant exposure to Asia, a region where strong population growth and urbanization will drive ongoing investment in real estate,” Reyna said.

“While primarily consisting of REITs, green building includes building managers, building construction, and consultation on green buildings, which drives the industry-level exposure above,” he added.

Morgan Ellis, Vice President, ESG Research, MSCI, underscored the growing prospects of green buildings as a way for countries to cut down on excess emissions. For example, in 2019, buildings and related construction globally accounted for 35% of energy consumption, 38% of carbon emissions, and 55% of electricity use.

“Green buildings are intrinsic to climate change mitigation policies due to their lower energy consumption,” Ellis said.

Green buildings are on average 25% more energy efficient than conventional buildings. Financially they require 11% more time to build and are a total of 6% more costly. However, the value premium associated with these green buildings ranges from 13% to 37% on transaction prices. Looking ahead, the market has $24.7 trillion in investment potential by 2030.

Green buildings provide a number of positive impacts, including higher energy efficiency, higher water efficiency, healthier indoor environmental quality, better waste management in construction and operations, environmentally friendlier construction materials, and sustainable siting.

“A new momentum for coordinated global climate policy could be on the horizon with the new Biden administration. Green buildings are key to global environmental and energy policy,” Ellis added.

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