Are Carbon offset ETFs passive ESG?

Uncovering how Europe’s first carbon offset ETFs work and where they should be positioned in the effort to decarbonise the global economy The arrival of Europe’s first carbon-offset ETFs coincides with a growing chorus accusing passive investment products of doing little more than paying lip service to environmental issues. […]

The arrival of Europe’s first carbon-offset ETFs coincides with a growing chorus accusing passive investment products of doing little more than paying lip service to environmental issues. What now needs to be ascertained is whether the arrival of these ETFs creates a tangible impact or just another layer of greenwash.

A report published by InfluenceMap in August, titled Climate Funds: Are They Paris Aligned?, illustrated just how short supposedly ESG products are falling from the emissions targets set out in the Paris Agreement.

It found, of the 593 equity funds falling into the broad ESG category, 421 scored negatively for Paris Alignment and 42% allocate to companies with fossil fuel reserves. Similarly, of the 130 climate-specific funds in Europe, 55% do not score positively on Paris compatibility, while this product class alone had $153m of aggregate exposure to the fossil fuel production value chain.

On the potential impact of carbon offset ETFs on sustainable investing, Herculano said they highlight the importance of climate change mitigation but unfortunately, they risk diluting what can be considered a “real” impactful investment from an environmental point of view.

Within an ETF context, such considerations are important. If carbon offsets can slow the capital flight being led by ESG products with sector exclusions, perhaps the world’s worst polluters can focus their resources on greening their operations, rather than paying lofty yields to attract investors. Others think that carbon offsets won’t work at all because they are too passive.

An exchange-traded fund, often shortened to ETF, is a collection of securities that are traded on an exchange. They have characteristics and potential advantages that are comparable to those of equities, mutual funds, or bonds. Like individual stocks, ETF shares are bought and sold throughout the day at prices determined by supply and demand.

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How can we decarbonize the global economy?

The first thing to know is that carbon intensity—the amount of carbon dioxide produced per unit of economic activity—has already been dropping. The world economy grew by about 3 percent annually in the 1980s and 1990s, but it grew by only about 1.8 percent annually between 2000 and 2013. This change reflected mainly a shift away from energy-intensive manufacturing toward energy-intensive service industries, such as finance and insurance, real estate, business services, health care, and education.

However, this doesn’t mean that the global economy is becoming more efficient. Gains in carbon intensity have slowed during the past decade because growth has shifted toward low-carbon parts of the world economy—mainly the developed economies—and away from high-carbon parts. This shift occurred because developed countries embarked on ambitious programs to promote energy efficiency and renewable energy sources, which dramatically reduced carbon intensity. Developing countries experienced much faster economic growth than developed countries did over that period, but their carbon intensities did not decline nearly as fast because many of them had yet to adopt similar policies….more to come.

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ESG: The New Way of Doing Business in Paris, FR

Business and organizational sustainability is a complex issue in Paris, with many stakeholders and perspectives. It’s also an area where the stakes are high – if we don’t get it right, there will be dire consequences for our communities and the planet.

The good news is that more investors are taking notice of ESG issues when they invest in Paris companies and organizations. In fact, over the past decade institutional investors have been increasingly incorporating Environmental, Social and Governance factors into their investment decisions. And soon it will be impossible to win any RFP’s without it.

We want everyone (not just big institutions in Paris) to be able to incorporate ESG-related risk into their actions because Companies that don’t adapt to these changes will not survive. This change has many companies in Paris scrambling to figure out how they can stay competitive and be profitable while also contributing to a better future.

ESG The Report is one solution that helps businesses in Paris find their niche in this new landscape by providing information on risks and opportunities related to environmental, social and governance factors affecting them today. Our report offers insights into what investors are looking for from companies in Paris and around the globe.

ESG Frameworks provide investors with insight into how companies are performing in terms of corporate governance, social issues, labour standards and environmental impact. Ask about our ESG Frameworks package to help you get started on making your company, department or organization diverse, equitable and inclusive for all stakeholders.