Franklin Templeton has unveiled two new ETFs in Europe that help tackle climate change by tracking low carbon indices designed in accordance with the Paris Agreement – a framework to limit global warming to below 2°C.
Julie Moret, Global Head of ESG, Franklin Templeton.
The Franklin STOXX Europe 600 Paris Aligned Climate UCITS ETF and Franklin S&P 500 Paris Aligned Climate UCITS ETF are expected to list on Deutsche Börse Xetra, London Stock Exchange, and Borsa Italiana this week.
The funds provide exposure to stocks from mainstream European (STOXX Europe 600) and US (S&P 500) equity benchmarks while re-weighting constituents in favour of those aligned with the transition towards a low-carbon and climate-resilient economy.
The European fund tracks the STOXX Europe 600 Paris-Aligned Benchmark Index, while the US fund follows the S&P 500 Paris-Aligned Climate Index.
Index construction is based on the criteria of the EU’s Technical Expert Group on Sustainable Finance (TEG). The TEG sets out standards for companies reporting ESG-related disclosures as well as for the construction of climate benchmarks. Its framework aims to reduce the risk of ‘greenwashing’ – the process of conveying a false impression about how a company’s activities and products are more environmentally sound.
Both indices first screen out unwanted companies from less desirable industries. The exclusion criteria are broadly similar and cover firms with activities related to controversial weapons, tobacco, coal, and fossil fuels. Additionally, companies that are non-compliant with international ESG standards are also removed.
An optimization process then reweights the remaining constituents so as to reduce the total carbon intensity of the indices by 50%, instantly aligning them with the Paris Accord objective to cut emissions by 50% by 2030. The optimization process also seeks to minimize the deviations in constituent weights relative to the parent universe. Furthermore, each index strives for at least a 7% annual decarbonization moving forward.
Climate-change strategies have been a favoured area of ETF product development lately, with a flurry of recent launches.
At the beginning of June, Lyxor unveiled global, US, and eurozone Paris-aligned equity ETFs with expense ratios of 0.20%. Fellow French issuer Amundi followed up with its own Paris-aligned suite just one week later, targeting global, European, and eurozone equity markets and landing with expense ratios between 0.18% and 0.25%.
Meanwhile, HSBC GAM began rolling out ETFs in June that combine ESG and low carbon methodologies. The funds, which are not specifically Paris-aligned, focus on US, European, and Japanese equity markets and charge between 0.12% and 0.18%.
Franklin Templeton has priced its new offering competitively, with the two ETFs having expense ratios of 0.15%.
The Franklin STOXX Europe 600 Paris Aligned Climate UCITS ETF will trade on Xetra in euros (FLXP GY), on LSE in pound sterling (EUPA LN) or euros (PARI LN), and on Borsa Italiana in euros (EUPA IM).
Meanwhile, the Franklin S&P 500 Paris Aligned Climate UCITS ETF will trade on Xetra in euros (FLX5 GY), on LSE in pound sterling (500P LN) or US dollars (USPA LN), and on Borsa Italiana in euros (USPA IM).
Julie Moret, Global Head of ESG, Franklin Templeton, commented, “The ascent of climate change on the EU’s regulatory agenda has resulted in the creation of two new EU climate benchmarks which provide clear rules that ensure the indices are comparable and transparent. The Paris-Aligned Benchmark’s philosophy is unique and forward-looking as it aims to not only reduce climate change risks but also contribute to the transition to a low carbon economy and capture its benefits and opportunities.
“The EU Climate Benchmark regulation suggests we will see a significant uplift in the adoption of climate-aligned investments across European markets with investors moving away from the notion that they are niche products to building portfolios with sustainable finance at their core.”
Caroline Baron, Head of ETF Sales EMEA, Franklin Templeton, added, “We are delighted that our new Paris Aligned Climate ETFs will provide access to this ‘forward-looking’ investment solution at a very competitive cost of 15 basis points and will be the cheapest climate ETFs in the European market. These new launches are an extension of our current sustainable investment offering within our strong line up of 16 smart beta, active, and passive ETF strategies for European investors. We believe these new solutions will appeal to a wide range of investors, specifically insurance companies, discretionary wealth managers, and family offices, and will be used as either a replacement for traditional non-compliant indices or a complement to existing compliant holdings.”
Rafaelle Lennox, Senior ETF Product Specialist, Franklin Templeton, said, “We have collaborated with established index providers, S&P Dow Jones Indices and Qontigo on these new ETFs and selected the key parent benchmarks that we believe are most relevant to our clients, S&P 500 & STOXX Europe. Both index providers have partnered with carbon data specialists in the assessment of companies’ climate change risk profiles, policies, targets, and decarbonization trajectory in the development of these technical and ground-breaking climate benchmarks. These Paris-Aligned indices have ambitious carbon reduction targets but also meaningful broader environmental, social, and governance (ESG) components, thus creating a core sustainable solution.”