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Record-breaking ETF Selects “Best Companies” on Climate Action

The launch of the biggest-ever ETF, focused on the climate transition, has raised eyebrows for exposure to fossil fuel and technology stocks, but it tracks EU regulation say those involved.  

Ilmarinen, Finland’s largest private earnings-related pension insurance company, has defended holdings in the new NYSE-listed ‘Xtrackers MSCI USA Climate Action Equity ETF’, which includes Chevron, JP Morgan and Google among its top 20 stocks. 

Last week, Ilmarinen seeded the largest-ever ETF launch to date with US$2 billion. The Climate Action Equity ETF is managed by German fund manager DWS and is designed for investors seeking exposure to large and mid-cap companies in the US that are leading on the climate transition.  

But the ETF has come under scrutiny for holding fossil fuel giant Chevron as one of its top 14 stocks, with seven out of its top ten stocks from the technology sector, including Amazon and Google. JP Morgan and other US banks are facing a number of shareholder resolutions this AGM season for the slow pace of their withdrawal from fossil fuel finance. 

Speaking to ESG Investor, Juha Venäläinen, Senior Portfolio Manager at Ilmarinen, said the stocks in the Climate Action Equity ETF were “pretty similar” to the stocks in the MSCI USA Paris-Aligned Index with one of the important differences being that the energy sector was not excluded. 

Targeting carbon neutrality

 Venäläinen added Ilmarinen’s philosophy was driven by an assumption that by 2035 the world will need an energy sector and a materials sector. “We’ve chosen to pick the best companies on climate action in each sector using four different criteria: emissions intensity, approved emission targets or credible track record, climate risk management, and green revenues.” 

He continued that the climate transition will likely not be linear, and the risk of cutting out a lot of companies in a portfolio is that it will be too concentrated. Picking the “better half” on climate in each sector will reduce this risk, he said. “We have the hope that this will lead to carbon neutrality, but it remains to be seen.”   

Head of Responsible Investment at Ilmarinen Karoliina Lindroos added that a pension company needed to consider multiple goals and mandates, not just climate action. “We also need diversification and an appropriate risk and return.”   

Venäläinen added that its fund was a passive product based on indices, arguing that observers also needed to look at the underlying index and the methodology to understand why some companies are included or excluded.   

Ilmarinen has seeded a number of ESG or climate ETFs due to a general lack of suitable product in the market, said Venäläinen.  

The firm has switched to climate/ESG benchmarks for its equity portfolios to enable it to stay on track with its ambitious climate target and help incentivise companies on climate performance. 

Arne Noack, Head Systematic Investment Solutions, Americas at DWS Group, added that the index tracked by USCA has been designed to have broad representation across all sectors of the economy, in recognition that all sectors of the economy are needed for an effective climate transition. In addition to that, allocation to all economic sectors are needed by some investors to not deviate too far from their standard market-cap weighted benchmark indices. 

“With regards to the point related to exposure to technology companies, we would like to point out that the overall portfolio’s exposure to this sector is actually slightly below the weighting of technology companies in its standard MSCI USA parent index: 24.3% in USCA vs 25.7% in the standard MSCI USA index (data as of yesterday),” he added.  

 

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