ESG vs Low Carbon Investing

Highlighting the Complexity of the Sustainable Investing

March 2020. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • ESG and Low Carbon portfolios feature significant, but different sector & country biases
  • Investors should expect large tracking errors in some ETFs
  • Some products contain stocks that are likely unexpected and undesired

INTRODUCTION

Investors seeking exposure to global equities with a low carbon footprint could consider the iShares MSCI ACWI Low Carbon ETF (CRBN) or SPDR MSCI ACWI Low Carbon ETF (LOWC). CRBN has $500 million of assets under management, compared with $90 million for LOWC. Both charge a management fee of 0.20% per annum.

However, investors might be surprised to learn that both have a 3.5% allocation to the energy sector and include companies like Schlumberger, Valero Energy, and Halliburton. The ETFs are not defined as fossil-fuel-free products, but the exposure to companies that have oil and gas as their core business activities might disappoint some investors that do not spend time thoroughly analyzing the portfolios.

The portfolio construction of the ETFs can be explained by these companies featuring a low carbon footprint, the focus of ETF issuers on minimizing a tracking error to a benchmark, or a combination of both.

Not all energy companies should be considered as bad corporates from a carbon perspective as they can offset carbon emissions. Although treated with some scepticism, the oil giant BP recently announced to become a carbon-neutral company by 2050.

Doing good while investing appeals to almost all investors, but large tracking errors do not, which has led some data providers to evaluate the carbon footprint of companies on a relative basis within sectors. Given this, a low carbon product can hold companies that might be considered as truly evil by environmentalists, but will not deviate significantly from a benchmark index.

Low carbon investing should be simple, but is unfortunately complicated. ESG investing is even more complicated as there are additional criteria that need to be considered in the stock selection process (read ESG: What is Under the Hood?).

In this short research note, we will contrast ESG and l