Franklin Templeton’s Paris-aligned climate ETFs are two of the first UCITS ETFs on the market aligned to the new European Union Climate Benchmarks Regulation.
Here, Rafaelle Lennox, ETF product strategist at Franklin Templeton, provides an insight into the drivers and philosophy behind these ETFs.
What was the rationale for launching the Franklin STOXX Europe 600 Paris Aligned Climate UCITS ETF and the Franklin S&P 500 Paris Aligned Climate UCITS ETF?
Growing pressure for businesses to adopt a more streamlined approach to carbon target setting and measurement – as well as provide increased levels of transparency and disclosure – has prompted new legislation across Europe, including the creation of two new EU Climate Benchmarks: Paris-Aligned Benchmark (PAB) and Climate Transition Benchmark (CTB).
Mindful of this regulation – and the climate disclosure obligations investors are increasingly subject to – we wanted to create an indexed solution which would help our clients both reduce risk and access opportunities in the low carbon transition.
What we initially found however, was that most existing indices only assessed the historical emissions and carbon footprint of companies, while our aim was to create a fund that in addition to measuring those ‘backward-looking’ criteria would also take a ‘forward-looking’ view.
The new EU Climate Benchmark – with minimum standards that consider both risk and opportunity-oriented factors – provided the ideal framework to create a robust, low carbon solution aligned to the goals of the Paris Agreement.
Low-carbon and climate-focus strategies are growing their presence in portfolios at a remarkable pace. How does an ETF and its index-tracking methodology help investors incorporate those strategies?
Historically, environmental strategies have been niche, pure-play exposures which investors have allocated to on satellite basis. However, an index which both assesses the climate policies and profile of all stocks within a major benchmark, such as the STOXX Europe 600 or S&P 500, and also includes a substantial ESG component – with assessments on a company’s alignment with SDG 13 Climate Action, and exclusions of UNGC violators, as well as companies involved in tobacco or controversial weapons – enables investors to allocate to a core sustainable solution.
And, of course, this solution is available to investors with all the benefits of the ETF wrapper such as liquidity, low cost and ease of access.
From conversations with clients and investors, what do you see as their main objectives and considerations when implementing decarbonised portfolios?
Several points come to mind. Firstly, clients we speak to are increasingly looking for core sustainable solutions which are aligned with upcoming regulation such as the directives coming out of the EU Sustainable Action Plan.
They are looking to utilise these strategies for risk reduction purposes, to reduce the climate change risk exposure of a portfolio, both in terms of physical and transition risk. But they also want to access the opportunities in the low carbon transition, and where possible, minimise the tracking error from the parent benchmark.
And finally, investors want to see measurable impacts in a decarbonisation strategy. Alignment with the Paris Agreement and the IPCC’s trajectory on the greenhouse gas emission reduction targets required to keep global warming increases below 1.5C is the most relevant scale for today’s climate portfolio analysis.
Title: Franklin Templeton’s Paris Aligned Climate ETFs provide low-cost access to core allocations of US and European equities, enabling investors to align their portfolios with the decarbonisation goals of the Paris Climate Agreement in one simple trade.
Franklin STOXX Europe 600 Paris Aligned Climate UCITS ETF
EUPA LN - £ line
PARI LN - € line
Franklin S&P500 Paris Aligned Climate UCITS ETF
500P LN - £ line
USPA LN - $ line
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