State Street Global Advisors has introduced two equity ETFs in the US which are aligned with the carbon reduction goals of the Paris Agreement.
Ron O’Hanley, Chairman and Chief Executive Officer at State Street Corporation.
The SPDR MSCI ACWI Climate Paris Aligned ETF (NZAC US) and SPDR MSCI USA Climate Paris Aligned ETF (NZUS US) are listed on Nasdaq with expense ratios of 0.12% and 0.10%, respectively.
NZAC and NZUS house $250 million and $150m in assets, courtesy of a significant investment from UC Investments, the investment arm of the University of California.
The funds are linked to ‘Climate Paris Aligned’ indices from MSCI – the MSCI ACWI Climate Paris Aligned Index and MSCI USA Climate Paris Aligned Index – providing broad exposure to global and US equity markets while managing risks associated with, and pursuing opportunities arising from, the transition to a low carbon economy
The indices are based on the parent MSCI ACWI and MSCI USA index universes of large and mid-cap stocks across global (developed and emerging) and US stock markets, respectively. Each parent index covers approximately 85% of the total market capitalization in its target segment.
The methodology first removes companies embroiled in severe ESG-related controversies as well as firms with business operations linked to weapons, tobacco, thermal coal, oil & gas, or oil sands.
The indices then reweight the remaining securities based on the risks and opportunities associated with the climate transition. MSCI harnesses a diverse range of data and analytical tools to aid in index construction including scope 1, 2, and 3 carbon emissions, green revenues, and the index provider’s own proprietary low carbon transition score and climate value-at-risk measures.
The indices offer an immediate 50% reduction in weighted average carbon intensity as well as a further 10% annual decarbonization going forward, aligning with a trajectory to limit global warming to 1.5°C above pre-industrial levels by 2050.
In addition to the above primary objectives, the optimization process aims to achieve secondary objectives such as maximizing exposure to sustainable energy providers, increasing the weight of companies with clear carbon reduction targets, minimizing fossil fuel exposure, reducing climate value-at-risk by 50%, and maintaining modest tracking errors relative to the parent universes.
Ron O’Hanley, Chairman and Chief Executive Officer at State Street Corporation, said: “Climate change almost certainly will drive significant structural shifts in the global economy, pose new risks to and opportunities for long-term investments, and potentially create risks to the financial system. Our primary focus is on long-term value creation for investors. We apply the insights we gain from working with global institutional investors to our own ESG priorities as a company.”
Jagdeep Singh Bachher, Chief Investment Officer at UC Investments, added: “Our sustainability framework encompasses the foundational values and principles that guide our investment decisions. As an early-stage investor in these new ETFs, we hope to open the door to others who, like us, believe that clean energy will fuel the world’s future and wish to invest in a decarbonized portfolio to improve the risk and return characteristics of their holdings over longer periods of time. We are excited that these funds are being brought to a broad investor base. We believe that investing in climate solutions, not climate problems, will provide superior risk-adjusted returns.”