Fascinating developments in the ESG ETF space took place across both sides of the Atlantic last week as Europe saw the launch of the first carbon offsetting ETF while an activist hedge fund investor, responsible for winning multiple seats on Exxon’s board, entered the ETF industry in the US.
Launched by former BlackRock employees, the Engine No.1 Transform 500 ETF (VOTE) looks to force operational change in the companies it tracks through activist board votes and pressure campaigns while the HANetf S&P Global Clean Energy Select HANzero UCITS ETF (ZERO) offsets monthly CO2 emissions produced by the underlying companies through sustainable projects provided by independent firm South Pole.
The moves signal a shift in the way issuers are using the ETF wrapper to offer strategies that have a material impact on the planet.
Impact investing has traditionally been the preserve of active managers with many viewing this as the last bastion the ETF space has, as of yet, been unable to breach.
As Fred Kooij, CIO at Tribe Impact Capital, said: “We believe active management is still the best approach to risk-adjusted good investing in the sustainable and impact investing space. Investors should not only get a higher level of risk management and investment opportunity identification, they also know that the companies they are exposed to are future fit.”
However, the launch of VOTE, in particular, which is set to target the largest 500 companies in the US by market cap, enables investors to reap the benefits of the ETF wrapper’s rules-based transparent structure while the issuer directly engages with management and convinces larger shareholders to back board proposals.
This is what the issuer, Engine No.1, achieved in late May when it won three seats on Exxon’s 12-member board despite aggressive efforts from the oil giant to dissuade shareholders from installing activist directors.
Meanwhile, the need to reduce carbon dioxide emissions is well documented in the fight against climate change. According to consultancy firm EcoAct, carbon credits can be a useful way in financing activities such as reforestation and renewable technological innovations.
The way HANetf’s ZERO will offset any carbon emissions is through projects such as the Topaiyo forest conservation project in Papua New Guinea and the Musi River hydro plant in Sumatra.
For sustainable-conscious investors, this offers a perfect way to track one of the United Nations Sustainable Development Goals (SDGs) – in this case clean energy – while offsetting any carbon emissions produced by the underlying companies.
From the investment perspective, the decision to select the S&P Global Clean Energy Select index is interesting. Investors may recognise this as the index tracked by BlackRock’s two clean energy ETFs that ran into liquidity risks following significant inflows last year which artificially drove up the price of the underlying holdings.
The index currently offers exposure to 31 pure-play clean energy stocks which could cause problems further down the line if the strategy proves to be very popular with investors. In the case of BlackRock’s clean energy ETFs, S&P Dow Jones Indices (SPDJI) changed the rules of the underlying index to incorporate 82 stocks instead of the original 31 following a market consultation, in a move that shored-up the strategies’ risk-return and liquidity profiles.
With HANetf incorporating the costs of the carbon offsetting projects within the 0.55% total expense ratio (TER) – 10 basis points cheaper than the iShares Global Clean Energy UCITS ETF (INRG) – this could have driven the firm’s decision to choose an index with fewer stocks and therefore less CO2 emissions that are needed to be offset.
Overall, however, last week’s launches are both exciting developments that show how the ETF structure can be used in the impact investing arena despite claims otherwise. It will be interesting to see how this space develops, especially on the engagement side, over the next 12 months.
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