Not-for-profit ETF issuer Impact Shares has unveiled a new global equity ETF designed for investors who wish to align their portfolios with the transition to a low-carbon economy.

The ETF provides exposure to a global equity portfolio that is aligned with the transition to a low-carbon economy.

The Impact Shares MSCI Global Climate Select ETF (NTZO US) has been listed on NYSE Arca in partnership with the United Nations Capital Development Fund (UNCDF), a UN agency that makes public and private finance work for the poor in the world’s 46 least developed countries.

The fund comes with a net expense ratio of 0.30%, down from 0.52%, due to a contractual fee waiver in place until at least November 2022. Any profit generated from the fund will be donated to the UNCDF.

Methodology

The fund tracks the MSCI ACWI Climate Pathway Select Index which was co-created by Impact Shares, MSCI, and a working group of the Global Investors for Sustainable Development (GISD) Alliance.

The GISD consists of 30 private-sector leaders of major financial institutions and corporations worldwide. It was established in 2019 by UN Secretary-General António Guterres to work at finding solutions that scale up private finance and investment necessary to achieve the UN’s Sustainable Development Goals.

The index selects its constituents from the MSCI ACWI universe which represents the full opportunity set of large and mid-cap stocks across developed and emerging markets.

The methodology first removes violators of UN Global Compact principles, companies embroiled in severe ESG-related controversies, and firms with business activities linked to controversial weapons, tobacco, alcohol, civilian firearms, palm oil, and fossil fuels.

The remaining constituents are assigned sustainability scores from MSCI ESG Research which reflect a company’s ESG performance relative to sector peers. Those with the worst ESG ratings of ‘CCC’ or ‘B’ are also excluded.

The index then uses an optimization process to select and weight a subset of the remaining securities in order to meet certain ESG and climate-related objectives while adhering to diversification constraints.

The ESG and climate-related objectives, relative to the parent MSCI ACWI, include lowering the index’s carbon intensity (based on Scope 1, 2, and 3 emissions) by 30%, further reducing the index’s carbon intensity by 7% per annum going forward, doubling the weight of companies that have set measurable decarbonization targets of at least 7% per annum, and boosting the index’s overall ESG score by 25%.

In terms of diversification constraints, the index maintains a tracking error within 4% of the parent index. Any deviation in country or sector weights is capped at 5%, except for the energy sector which is unconstrained, and deviations in single stock weights are limited to 2%.

As of the end of September, the index contained 275 securities with more than half (54.6%) of the total weight allocated to stocks from the US and the next-largest country exposures being France (7.7%), Japan (5.7%), the UK (4.3%), and Canada (3.9%).

Stocks from the information technology and financials sectors dominate with weights of 27.6% and 19.0%, respectively, while industrials (14.4%), health care (9.3%), communication services (9.2%), and consumer discretionary (8.3%) also play significant roles.

Notable positions include Microsoft (5.2%), Alphabet (3.0%), Apple (3.0%), Schneider Electric (2.2%), and ABB (1.7%).

Using back-tested data, the index has outperformed the MSCI ACWI, generating an annualized return of 11.59% compared to 9.64% (the index’s inception date is November 2013).

The fund is the second ETF brought to market through a collaboration between Impact Shares and the UNCDF following the September 2018 launch of the Impact Shares Sustainable Development Goals Global Equity ETF (SDGA US). This fund tracks the Morningstar Societal Development Index, providing exposure to companies worldwide that are actively working to help achieve the UN’s Sustainable Development Goals (SDGs). SDGA comes with an expense ratio of 0.75% and houses around $5m in assets.

Preeti Sinha, Executive Secretary of UNCDF, said: “The need to address climate change impacts has never been clearer, especially for the world’s poorest and most vulnerable countries. We at UNCDF are very proud to support the GISD by issuing our second ETF with Impact Shares. NTZO demonstrates UNCDF’s ability to create innovative financial products that appeal to investors and continue to raise impact standards. And the fee donation will help the UN build climate resilience in the world’s LDCs.”

Ethan Powell, CEO of Impact Shares, added: “Extreme weather events and intensifying climate volatility are a stark reminder of the urgency of accelerating the carbon transition. Broad collaboration among key organizations such as the UNCDF and GISD is crucial in moving investors to decarbonize their portfolios and support the transition to a more sustainable economy.”