UN and partners launch climate-focused ETF

The United Nations and exchange-traded funds may seem an unusual combination. But on Wednesday, nonprofit ETF manager Impact Shares, in partnership with the U.N. Capital Development Fund, launched a climate-focused ETF.

The Impact Shares MSCI Global Climate Select ETF, or NTZO ETF, will be managed by Impact Shares, which is backed by The Rockefeller Foundation. It includes companies that meet a set of strict climate and other criteria.

Unlike some other climate ETFs, NTZO completely excludes all companies that own or profit from fossil fuels. It also requires participants to adhere to the principles of the United Nations Global Compact and bars any that profit from weapons, guns, alcohol, tobacco, or palm oil.

The MSCI Global Climate Pathway Select Index, which underpins the new ETF, index  “targets companies with climate transition opportunities, minimizes climate transition risks,” and includes companies that meet 7% annual carbon reduction targets, according to a statement quoting Stuart Doole, managing director of research at MSCI.

It has stricter environmental, social, and governance requirements compared with the MSCI ACWI Index, which is the parent market capitalization weighted index that the MSCI Global Climate Pathway Select Index was based on, Doole said.

Modeling of the new climate ETF against the parent MSCI index showed comparable or better performance, which UNCDF hopes will help make the case for investment, said Esther Pan Sloane, head of partnerships, policy, and communications at the U.N. fund.

One of the factors that makes this ETF unique is that if it scales, it could provide a new funding stream for UNCDF. Impact Shares will donate net management fees, which UNCDF will use to fund climate resilience and adaptation in low-income countries confronting severe structural impediments to sustainable developments. UNCDF works to unlock public and private capital to address development challenges in the developing world.

The ETF was designed in collaboration with the Global Investors for Sustainable Development Alliance, a group of business leaders convened by the United Nations to scale private finance and investment solutions for the Sustainable Development Goals.

“With this climate ETF aimed at tackling [the climate change-focused] SDG 13, we have created a real opportunity for investors to finance greater good,” said Investec CEO Fani Titi, a GISD member, in the statement. “It is exciting to see our work with the United Nations and other partners to develop standards and tools to mobilize investment in sustainable development paying off in this investment product.”

The ETF launched with about $2 million, though the initial goal was to start with a larger sum, Sloane said. ETFs must reach a certain size threshold to be listed on trading platforms and to attract institutional capital, but this one has fallen short of that at launch.

While a bank would likely have waited until it had more funds committed before launching, UNCDF wanted to “go with the moment and build momentum afterwards,” Sloane said, adding that it’s taken longer than anticipated for organizations to do due diligence and make a determination about investing.

Unlike other ETF managers, Impact Shares’ running costs are paid by Rockefeller, so the ETF can afford to grow over time, she said.

One of the primary goals with the launch of this ETF is to prove that the U.N. can release a vehicle with commercial appeal to financial markets, Sloane said. But unlike traditional issuers, the U.N. doesn’t have a distribution infrastructure or sales network, putting it at a disadvantage, she added.

This is not the first time that UNCDF and Impact Shares have partnered on an ETF. They launched the Sustainable Development Goals Global Equity ETF in 2018, though it didn’t take off quite as they had hoped. One of the lessons that UNCDF tried to learn is that launching with significant assets is important; otherwise, distribution infrastructure and scale will be challenging.

Co-creating the ETF with GISD was expected to ease some challenges and facilitate investment. But despite controlling assets worth about $16 trillion, GISD members have seemingly not made significant investments into the new ETF thus far.

Some are constrained by technical and legal requirements that govern them, Sloane said.

Global leaders increasingly agree that driving investment to tackle climate challenges is important, but a key measure of the value of discussions at the U.N. Climate Change Conference this month will be what actions people take, she said.

“Everyone is saying the right stuff, but the problem persists,” she said, adding that if people are not willing to move assets to decarbonize portfolios, then they don’t really see climate change as an existential threat.

This coverage exploring innovative finance solutions and how they enable a more sustainable future, is presented by the European Investment Bank.