Navigating ‘climate-aware’ ETFs: Stay safe out there
In Europe, 44 ‘climate-aware’ Exchange Traded Funds (ETFs) exist, and the CIRCA5000 Green Energy & Technology (C5KG) is one of them.
The number of climate-focused portfolios available to investors has grown by 600% since 2018, according to Morningstar. The exponential growth of these ETFs is a positive sign. But investors should tread carefully. Climate-aware ETFs are not created equal; they vary in operational approach and quality.
For example, HSBC MSCI World Climate Paris Aligned UCITS ETF is Paris-aligned. Its holding companies aim to reduce carbon emissions in line with the requirements of the Paris Agreement.
Though the ETF seeks to ‘minimise exposure to climate risks’, investors should note that this does not mean that companies in this ETF are necessarily geared towards positively impacting the environment or society. To cherry-pick some of the top-10 holdings in this fund, we found Apple, Microsoft, Meta and Nvidia. None of which would make the cut for an impact fund. All this to say, sustainability-minded investors must constantly ask whether the ETF they are considering weighs the positive social and environmental impacts or simply seeks to mitigate exposure to climate risks.
This really is the crux of the ESG vs. impact investing debate.
ESG is a risk framework — in other words — How can we protect investors from the risks posed by climate change?
Impact investing drives capital to businesses that have been assessed for their ability to actionably drive positive environmental and social impacts. In a Financial Times article released today, Fabiola Schneider, co-lead of the GreenWatch project, highlights that the labelling system for ESG funds leads to “disillusion”, and some issuers are “trying to exploit that confusion… by appearing greener than everyone else”.
At CIRCA, we exclusively issue impact ETFs. You can explore the meticulous methodology behind our funds here.
Interested in how our ETFs might fit into your portfolios? Just reply to this email to speak to one of the team.