'Climate Change' Coming To ETFs

[ETF Pulse appears Mondays and Thursdays. Drew Voros is Editor-in-Chief of ETF.com.]

The forecast I’m hearing from Europe and the U.S. is that we’re going to start seeing a new phrase dominate the “socially responsible” and “ESG” (environmental, social and governance} investment spaces, which are currently clouded by confusion and ambiguous marketing.

“Climate change,” I suspect, will slowly start to move into the names of these kinds of funds, and in doing so will provide more clarity and focus to investors, targeting what they really want.

Investing in companies that are doing something about “climate change” allows them to move on from the “S” and the “G” in ESG that few understand or can define.

“E is for environment” is something everyone can understand, and with this moniker change that is already in full bloom in Europe and now being adopted by the world’s largest index provider, the sands hopefully will shift to a more defined exposure.

Weather Wild Cards Seen More

Despite the fact that Earth’s climate has altered significantly over billions of years—the Sahara Desert used to be a jungle before fossil fuels were even a thought—the pace has clearly accelerated, and climate change is touching more and more of us every day.

We just saw the effects writ large a few weeks ago. At the same time New Orleans was being devastated by Hurricane Ida—the remnants of which caused historic flooding in NYC and surrounding areas—an enormous portion of the Sierra Nevada mountains was consumed by a historic wildfire, engulfing nearly 18,000 homes in South Lake Tahoe and surrounding mountains.

Europe Already Changing

For me at least, using the two simple words “climate change” makes it crystal clear to investors what they’re dipping their toe into. Due diligence and understanding what’s under the hood will be required just as much as today, but for the retail investors not familiar with ETF.com or investment media, they won’t be lost in the alphabet soup of “ESG.”

Europe has led the ESG investing revolution that America has adopted but not fully embraced. European government and corporate mandates surrounding the environment, social issues and governance concerns are long-standing beliefs, not a political or marketing ploy.

Really since 2015 with “The Paris Agreement,” a legally binding international treaty on climate change, investment products have begun to focus more intensely on “climate change.” The use of the phrase is bountiful in the names of investment vehicles in Europe.

There is not a single U.S.-listed ETF that uses “climate change” in its name. Some U.S. ETFs use terms like “climate leaders” and others, but none use those two crystal clear words. For instance, the Etho Climate Leadership U.S. ETF (ETHO) almost says it, but still doesn’t resonate to the masses. And the U.S. Vegan Climate ETF (VEGN) tries, too, but what is a “vegan climate”?

MSCI Leading The Way

The above European examples all rely on MSCI’s “climate change” indexes and data, and the index provider is getting even more granular in its metrics, which we are sure to see in any future benchmarks from the indexer. Just this week MSCI announced a new expansion of its Climate Value-at-Risk research product:

“MSCI launches Implied Temperature Rise

MSCI … has announced the launch of its Implied Temperature Rise (or “Temperature Rise”) solution, equipping investors globally with data to map how companies in their investment portfolios are aligning with global temperature targets. The company-level dataset will cover nearly 10,000 publicly listed companies based on the MSCI ACWI Investable Market Index.

Used alongside MSCI’s Target Scorecard, which will allow institutional investors, for the first time, to make direct comparisons between a company’s climate commitments and ascertain which company has a realistic decarbonization target."

Pretty clear to me that the MSCI kitchen is cooking up an index that incorporates these metrics.

More Metrics Coming

One of the goals of MSCI going forward is to provide more metrics and eventually indexes that ETF issuers can use to bring a more laser-focused approach to environment-related investing than what we have now in the U.S.

There are more than 80 ETFs listed in the U.S. using “ESG” in the name. And like national forests in this country, those 80 ETFs are often very different from each other despite carrying the same banner.

The waters are being blurred by too much of a good idea, leading to heavy weightings to large caps, conflicting goals and too many oil companies like Exxon and Chevron sitting in funds that are ultimately intended to help our planet. However, those issues are the same ones that ultimately hamstring them.  (Read: “ESG ETFs Looking Polluted”)

Drew Voros can be reached at [email protected]