The investing universe is home to a lot of buzz words and catchphrases and that lexicon is only growing larger as environmental, social and governance (ESG) investing takes shapes.
One of the dominant concepts emerging is carbon awareness/readiness. It helps that it's being pushed by some of the largest asset managers in the industry. As has been widely noted regarding ESG, it's often easiest for fund issuers, index providers and companies themselves to execute on the “E.” Arguably, it's the concept of the three with the smallest gray area and it has so much momentum among stakeholders, it's the one clients are likely most familiar with.
Within the environmental investing realm, one of the most practical ways of quantifying this concept is via carbon emissions relative to sales. In plain English, can a company spur top line growth without a hefty carbon footprint? This application has some heavy institutional support.
“We think that while it’s important to identify companies already operating efficiently and emitting less relative to peers, there’s also benefit in identifying those companies taking their reduction plan seriously and making objective progress toward lower emission targets in the future,” according to BlackRock. “Hence, tracking a company’s “emissions momentum” can be a sign of future success. An increasing number of investors and vendors now track and provide carbon metrics from the CDP (formerly the Carbon Disclosure Project), including Bloomberg, MSCI and BlackRock.”
Putting It Into Practice
Owing to environmentally conscious investing receiving so much attention in the mainstream, it's reasonable to expect clients will have questions. Moreover, they'll want solutions that can be deployed within their portfolios.
A growing number of exchange traded funds meet that demand, including the newly minted BlackRock U.S. Carbon Transition Readiness ETF (NYSEARCA:LCTU) and the BlackRock World ex U.S. Carbon Transition Readiness ETF (NYSEARCA:LCTD).
Confirming significant institutional support for carbon investing, LCTU and LCTD – both of which are actively managed – debuted in early April and have about $1.9 billion in combined assets under management. LCTU, the domestically focused of the pair, is already one of the most successful ETF debuts of all time.
LCTU will try to beat the Russell 1000 Index while LCTD will look to top the MSCI World ex USA Index by allocating to “equity securities that may be better positioned to benefit from the transition to a low-carbon economy,” according to BlackRock.
Those are straightforward approaches that advisors can effectively convey to clients and they should because it's impossible to deny if they don't today, many clients soon will prioritize sustainable investing.
“We believe that financial markets are only beginning to appreciate the potential impact of the shift toward sustainability on asset prices,” adds BlackRock. “The convenience that ETFs provide can further catalyze a synchronized move toward sustainability that we believe over time will help make the most sustainable assets become more valuable and the least sustainable assets less valuable.2 BlackRock thinks such a tectonic shift will reward first-mover investors and give companies meaningful incentives to accelerate their transition to a low-carbon economy.”
Some Active Allure
As advisors well know, active management, broadly speaking, has taken some lumps against its passive rival. However, there are segments of the market still conducive to active and carbon investing may prove to be one. With active management, funds such as LCTD and LCTU provide alternatives to the often blanket-esque sector exposure found in passive ESG products.
“BlackRock’s analysis shows that other industries, such as materials, industrials, utilities and consumer discretionary, have high exposure to the low-carbon transition,” says the asset manager. “For example, auto-makers and leisure companies can have emissions profiles on par with energy exploration companies. Put simply, we think there will be winners and losers across sectors as the world shifts to energy-efficient practices and low-carbon technology. Investors should review exposures across their entire portfolio.”
Regardless of chosen vehicle, the carbon tide is turning and it's one with which clients will demand change for the better. Advisors should prepare accordingly.
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