ETF Strategy reached out to Hector McNeil, Co-Founder and Co-CEO of HANetf, to find out more about its new HANzero™ product feature which aims to counteract the carbon emissions of a portfolio by purchasing carbon offsets in climate-positive projects.

Hector McNeil, Co-Founder and Co-CEO of HANetf.

Simon Smith: What is HANzero™?
Hector McNeil: HANzero™ is a carbon offset product feature by HANetf, in which we seek to neutralise the inferred CO2 emissions (Scope 1 and 2) of an ETF by purchasing carbon offsets in climate-positive projects. This scheme is the first of its kind in Europe for ETFs.

SS: What’s the advantage of this feature over ESG ETFs or low-carbon Paris-aligned ETFs?
HM: ESG strategies, even explicit low-carbon strategies, carry a carbon footprint. They try to tilt towards companies that exhibit relatively lower carbon emissions, but there’s still a carbon footprint nonetheless. Paris-aligned funds, meanwhile, target net zero by 2050 – that’s almost 30 years more net positive carbon being pumped into the atmosphere! We at HANetf believe this is too late, which is why we developed HANzero™ to offer an immediate solution – investors don’t have to wait, they can have net zero now. I also think product providers often wait for clients to tell them what they need, but, on climate, I think it’s incumbent on product providers to be highly proactive on solutions.

SS: So what is carbon offsetting?
HM: Basically, there are two ways to reduce the amount of CO2 in the atmosphere and achieve net zero. The first is to avoid emissions, this relates to cutting carbon emissions through the use of green energy, such as wind, solar, and tidal etc. The other way is carbon sequestration. Sequestration helps to reduce emissions that have already been produced. This can be done, for example, through reforestation and/or a reduction in deforestation, or the introduction of alternative non-carbon-emitting income sources in developing countries. Carbon offsetting fits into this concept. A carbon offset reduces emissions of carbon dioxide or other greenhouse gases made to compensate for unavoidable emissions produced elsewhere. Such schemes allow individuals and companies to participate in projects to counterbalance their carbon footprint.

SS: How exactly does it work with reference to ETFs?
HM: We use the Carbon-to-Value-Invested ratio (Metric tons CO2e /USD 1 million invested), which is how many tons of carbon (scope 1 and 2, that’s basically the carbon footprint of direct operations plus first-tier supply chains) are emitted per annum by the companies in the ETF multiplied by their weight in the portfolio, relative to a $1m investment for one year. This ratio is based on carbon intensity data provided by Trucost, which is part of S&P Global. At the end of the quarter, we take the total accrued emissions estimate of the ETF (i.e. tons of carbon attributable to the fund’s ownership of the portfolio companies) and then purchase carbon offsets to match that number to achieve carbon neutrality.

Carbon offsets can be purchased in amounts as little as one ton. In the regulated market, for example, the cost of one EU Allowance is approximately EUR 55 per ton. The carbon offsets we purchase fund investments in carbon-reduction projects and the cost of this is covered by the fund’s fixed TER.

Note, that while the money paid out through the HANzero™ scheme is an “investment” in carbon offset projects, the cost is an expense to the fund. HANetf will get a certificate to prove the purchase of the offsets and which will be retired in a carbon registry. This means they cannot be traded or sold again.

Musi River Hydro Plant in Sumatra, Indonesia.

SS: What kind of projects will be funded? And how do you select these?
HM: We work with an organisation called South Pole to identify and select suitable projects. South Pole are leading experts in carbon offsetting projects. All projects will be linked to the UN’s Sustainable Development Goals and will result in what’s called “additionality”, meaning that without funding, the projects would not be able to proceed. Typically projects will protect ecosystems or help install efficient technology to reduce or remove emissions from the atmosphere, while also supporting local community development.

Projects we’re investing in right now include the Topaiyo Forest Conservation project in Papua New Guinea and the Musi River Hydro Plant in Sumatra, Indonesia. These projects – and all projects we invest in – are upheld to the standards set by the International Carbon Reduction and Offset Alliance (ICROA), and are subject to full screening, third-party auditing and in-house due diligence.

SS: Do you think this kind of carbon-offsetting approach could become mainstream practice?
HM: Absolutely. We – the team behind HANetf – have been in the ETF industry a long time, pretty much since inception, and we think this could be as big as currency-hedging, for example. When that was introduced, it was seen as innovative. Now, most of the large issuers offer currency-hedged share classes as routine. We think ETFs with in-built carbon offsetting could be similar.

SS: So, right now, what ETFs do you offer that incorporate HANzero™?
HM: There are two, with more to come. The first is the HANetf S&P Global Clean Energy Select HANzero™ UCITS ETF – ZERO, launched in partnership with Purpose Investments. This fund provides investors with exposure to global pure-play clean energy stocks while of course offsetting the carbon emissions of those clean energy companies. The second is the Saturna Sustainable ESG Equity HANzero™ UCITS ETF – SESG, an active global equity strategy managed by Saturna Capital, global asset managers with over 30 years of experience in socially responsible investing. Both funds are listed on the London Stock Exchange in GBP and USD.