If your clients want to do more good with their investments, they may be interested in two climate change exchange-traded funds that joined the more than 400 other climate-themed mutual funds and ETFs last month.
The iClima Global Decarbonization Transition Leaders ETF (ticker: CLMA) and the iClima Distributed Renewable Energy Transition Leaders ETF ( SHFT) are iClima’s first U.S.-listed ETFs. Both offerings are from the female-led, London-based firm iClima, which already has two European funds trading overseas.
The funds invest in companies leading the green transition. For CLMA, this means companies that derive their revenues from products and services designed to avoid greenhouse gas emissions. SHFT focuses specifically on companies advancing renewable energy such as solar and wind energy generation.
To learn more about the climate change investment landscape and what financial advisors should know about each of these new ETFs, we spoke with Gabriela Herculano, co-founder and CEO of iClima. She talks about what it means to “do more good” as opposed to just reducing harm and how climate change can fit into an investor’s portfolio. Here are edited excerpts from that interview.
Why should investors and financial advisors be thinking about climate change when they make their investment decisions?
Climate change presents a huge risk, from physical damage to weather volatility to carbon taxation risk. That results in negative externalities for fossil-fuel-related companies that are still very relevant economic players.
Second, mitigating climate change is an exciting and sustainable investment opportunity. There are companies that move us away from products and services that are high in carbon emissions, and provide low or zero carbon emissions alternatives that allow our societies to continue to satisfy multiple needs. Those alternatives include familiar ones like electric vehicles or using renewable energy as opposed to coal-fired power plants. But there are also solutions like telepresence, heat pumps, smart meters or thermostats, plant-based food, and recycling processes.
Your funds invest with the mandate of “do more good” rather than “do less harm.” Can you explain what this means and, on a practical level, how you implement it in your portfolio selection process?
Companies where decarbonization is a cost line item face a limit to the level of environmental impact they can generate.
The so-called FAANG companies — Facebook Inc. ( FB), Amazon.com Inc. ( AMZN), Apple Inc. ( AAPL), Netflix Inc. ( NFLX) and Google’s parent company Alphabet Inc. ( GOOG, GOOGL) — are great corporate citizens. They are procuring energy from renewable sources in a massive way. In doing so, they are reducing what is called scope 2 emissions, or indirect greenhouse gas emissions caused by purchasing electricity, steam, heat or cooling.
Instead of focusing on the companies for which decarbonization is a (cost line) item, there should be a bigger focus on companies that innovate to mitigate climate change and environmental impact as well as companies that provide an alternative to high-emission products and services.
At iClima, we developed a dynamic methodology to capture companies we refer to as “climate champions.” We vetted hundreds of companies, so we could identify the ones with material green revenue and an acceptable level — but preferably no — “brown revenue” from fossil-fuel-based products and services.
To have a holistic picture of the corporate impact on climate change and to ensure that they are not engaged in environmentally harmful activities, we undertake a negative screening exercise that is based on undesirable revenues. In terms of fossil fuels, we screen for natural gas, diesel, coal, oil and other fossil fuels. We follow a set of principles, such as not allowing any oil and gas exploration and production, and companies that have more than 1% coal power as a total energy generation.
How are CLMA and SHFT different from similar ETFs?
CLMA focuses on the companies that can move us away from business as usual, or BAU, in terms of high emissions.
No other fund has a similar approach to what we think captures the effort to solve climate change. We base our index on tangible, quantifiable indicators. Those are namely green revenue as a percentage of total revenue, brown revenue as a percentage of total revenue, which is undesirable revenue related to BAU, and potential avoided emissions.
SHFT represents the decentralization of our energy systems, which we think is the most exciting clean energy story.
Decentralization of the energy system means that more energy generation is being added at the point of its consumption. A residential solar rooftop panel accompanied by a battery for clean energy storage is considered among distributed resources that are much more sustainable, as they can reduce environmental impact compared to the various processes of extraction, transformation and distribution of fossil fuels. Moreover, distributed generation from renewable sources have zero or lower greenhouse gas emissions than those currently in use.
What role would these funds play in a client’s portfolio?
We designed CLMA to be a core fund. It is a one-stop shop, especially considering its balance of 160 growth and value equities.
SHFT captures the most exciting trend in clean energy, and we expect to attract investors interested in gaining increased exposure to green energy way beyond utility scale and renewables.
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Update 09/01/21: This story has been updated to clarify how iClima implements its portfolio selection process.