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A new class of benchmark tackling climate change

Increasing demand for sustainable solutions

Rafaelle Lennox

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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.

ISIN

Tickers

TER

Franklin STOXX Europe 600 Paris Aligned Climate UCITS ETF

IE00BMDPBY65

EUPA LN - £ line

PARI LN - € line

0.15%

Franklin S&P500 Paris Aligned Climate UCITS ETF

IE00BMDPBZ72

500P LN - £ line

USPA LN - $ line

0.15%

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This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.

Franklin LibertyShares ICAV (“the ETF”) investment returns and principal values will change with market conditions, and an investor may have a gain or a loss when they sell their shares. Please visit www.franklintempleton.co.uk for the Franklin LibertyShares ICAV standardised and most recent month-end performance. There is no guarantee that any strategy will achieve its objective.

All performance data shown is in the fund's base currency. Performance data is based on the net asset value (NAV) of the ETF which may not be the same as the market price of the ETF.

Individual investors may realise returns that are different to the NAV performance. Past performance is not an indicator or a guarantee of future performance. The actual costs vary depending on the executing custodian. In addition, deposit costs may be incurred which could have a negative effect on the value. Please find out the costs due from the respective price lists from the processing/custodian bank. Changes in exchange rates could have positive or negative effects on this investment. Please visit www.franklintempleon.co.uk for current performance and see the latest prospectus or supplement for further details. Information is historical and may not reflect current or future portfolio characteristics. All portfolio holdings are subject to change.

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