Bocconi Students for Sustainable Finance

ARE WE MOVING TOWARDS A LOW-CARBON WORLD?

Sustainability metrics allow investors to evaluate funds based on their environmental, social and governance (ESG) risks and opportunities. This analysis can provide insights on the effectiveness of portfolio management in a long-term financial perspective. Moreover, business commitment metrics can help investors to gain a more comprehensive overview of the specific assets a fund may be exposed to through its investments. The latter is one of the most important goals BlackRock is trying to pursue. But let’s make a step back.

 Last week, institutional investors poured $ 1.25B in a new US fund aimed at identifying, through sustainable metrics, the “winners” of the transition to a low-carbon production, underlining the growing demand for ESG products, and making it the largest fund launch ever in an exchange trade. This ETF is secured by the BlackRock US Carbon Transition Readiness fund, that seeks long-term capital appreciation by investing in U.S. equity securities that may be better positioned to benefit from the transition to a low-carbon economy. The BlackRock US Carbon Transition Readiness fund began trading at the beginning of April 2021, quickly eclipsing the previous largest list of ETFs, the iShares ESG MSCI USA Leaders fund, that went out with $ 850 million in May 2019. The investment objective of BlackRock fund is to provide investors with a total return, considering both capital and income returns, which reflects the return of the S&P Global Clean Energy Index.

To date, the ETF comprises 30 of the largest publicly traded companies in clean energy related businesses that meet specific investability requirements. These companies are mostly located in U.S., China, Denmark, and New Zealand and mainly operate in public utility services, IT, and Industrials. The expectation is that companies that are actively transitioning to the low-carbon economy will outperform over the long term, to the benefit of investors.

Rather than excluding companies that are poorly rated on climate-related metrics, this new ETF takes the Russell 1000 Index and the MSCI All World and assigns portfolio weights that reflect the carbon transition score. ETF companies are ranked based on their dependence on power generation, clean technology, energy, waste, and water management. A higher carbon reduction rate will result in a company being overweighted in the ETF, if compared to the industry competitors. Rates are based on data that are collected internally from BlackRock through Aladdin Climate and from third party vendors including MSCI, Sustainalytics and Refinitiv, which provide a profile of each company’s specific business commitment in ESG.

“Winners and losers will emerge in every sector and industry based on each company’s ability to adapt and guide their strategies and business models. More and more capitals are being allocated to sustainable strategies. These funds will allow investors to understand which companies are moving faster than others ” claimed Larry Fink, chief executive officer of BlackRock. In fact, according to Morningstar, total industry assets in high ESG rated sectors increased 50% last year to a record $ 1.7 trillion.

Meanwhile, an increasing number of governments, corporations and wealth managers are committed to achieving the goal of zero net greenhouse gas emissions by 2050. Therefore, carbon transition ETFs are being launched to encourage this trend and take advantage of it.

Are we finally going to reach a low carbon world?

 

 

 

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ARE WE MOVING TOWARDS A LOW-CARBON WORLD?

Sustainability metrics allow investors to evaluate funds based on their environmental, social and governance (ESG) risks and opportunities. This analysis can provide insights on the effectiveness of portfolio management in a long-term financial perspective. Moreover, business commitment metrics can help investors to gain a more comprehensive overview of the specific assets a fund may be exposed to through its investments. The latter is one of the most important goals BlackRock is trying to pursue. But let’s make a step back.

 Last week, institutional investors poured $ 1.25B in a new US fund aimed at identifying, through sustainable metrics, the “winners” of the transition to a low-carbon production, underlining the growing demand for ESG products, and making it the largest fund launch ever in an exchange trade. This ETF is secured by the BlackRock US Carbon Transition Readiness fund, that seeks long-term capital appreciation by investing in U.S. equity securities that may be better positioned to benefit from the transition to a low-carbon economy. The BlackRock US Carbon Transition Readiness fund began trading at the beginning of April 2021, quickly eclipsing the previous largest list of ETFs, the iShares ESG MSCI USA Leaders fund, that went out with $ 850 million in May 2019. The investment objective of BlackRock fund is to provide investors with a total return, considering both capital and income returns, which reflects the return of the S&P Global Clean Energy Index.

To date, the ETF comprises 30 of the largest publicly traded companies in clean energy related businesses that meet specific investability requirements. These companies are mostly located in U.S., China, Denmark, and New Zealand and mainly operate in public utility services, IT, and Industrials. The expectation is that companies that are actively transitioning to the low-carbon economy will outperform over the long term, to the benefit of investors.

Rather than excluding companies that are poorly rated on climate-related metrics, this new ETF takes the Russell 1000 Index and the MSCI All World and assigns portfolio weights that reflect the carbon transition score. ETF companies are ranked based on their dependence on power generation, clean technology, energy, waste, and water management. A higher carbon reduction rate will result in a company being overweighted in the ETF, if compared to the industry competitors. Rates are based on data that are collected internally from BlackRock through Aladdin Climate and from third party vendors including MSCI, Sustainalytics and Refinitiv, which provide a profile of each company’s specific business commitment in ESG.

“Winners and losers will emerge in every sector and industry based on each company’s ability to adapt and guide their strategies and business models. More and more capitals are being allocated to sustainable strategies. These funds will allow investors to understand which companies are moving faster than others ” claimed Larry Fink, chief executive officer of BlackRock. In fact, according to Morningstar, total industry assets in high ESG rated sectors increased 50% last year to a record $ 1.7 trillion.

Meanwhile, an increasing number of governments, corporations and wealth managers are committed to achieving the goal of zero net greenhouse gas emissions by 2050. Therefore, carbon transition ETFs are being launched to encourage this trend and take advantage of it.

Are we finally going to reach a low carbon world?