Decarbonizing Portfolios with SPDR® MSCI Climate Paris Aligned ETFs
SPDR’s Climate Paris Aligned equity ETFs track leading MSCI indices and are designed to allow investors to meet their climate objectives now and into the future by decarbonizing their portfolios swiftly, effectively and cost-efficiently.
Climate: Pressure Is Mounting
The political will to act on climate is increasing. In 2021, the UN Climate Change Conference in Glasgow (COP26) reaffirmed the 2016 Paris Agreement goal to limit the increase in the global average temperature to well below 2°C above pre-industrial levels and pursue efforts to limit it to 1.5 °C. COP26 also pledged to further cut CO2 emissions among other climate-friendly actions.
Despite this progress, listed companies are putting carbon into the atmosphere at a rate that threatens to make the world 3°C warmer — double the warming for the worst effects of climate change.1
Yet, a confluence of factors continues to put pressure on companies to address climate, driving change across the investment landscape, including:
Regulation and Policy: The Paris Climate Agreement may be the catalyst for governments to speed up climate-aligned policies. The 196 countries that signed the treaty to cut carbon emissions are legally obliged to pursue regulations to help meet their responsibilities.
Increasing Climate Consciousness: Investors who are seeking to mitigate climate risk and to invest in climate solutions may drive demand for more ESG education, guidance, solutions and analytics.
Stakeholder Pressure: Corporate boards, employees, customers and investors are using their voice, vote and dollars to compel companies and organizations to address climate risks and opportunities. For example, activist investors have secured seats on Exxon Mobil’s Board.2
Global Pledges: Asset owners, asset managers and investor initiatives are aligning efforts to take action on addressing climate change, including:
Net Zero Pledge: Asset owners and managers pledge to support efforts to limit global warming to 1.5°C by 2050 by targeting net zero emissions across their holdings.
Climate Action 100+: An investor initiative to ensure the world’s largest corporate greenhouse gas (GHG) emitters take necessary action on climate change.
Time for Investors to Act
Investors have an opportunity to play a role in the reduction in global warming through decarbonization of their portfolios. Underscoring the momentum toward broad adoption of climate investing, in our recent investment survey, 61% of North American investors said that they would implement decarbonization targets within three years.3
Climate ETFs provide an efficient vehicle for investors who are looking to take action.
MSCI, a leader in climate data — and the provider of the indices tracked by our new climate ETFs — may help investors meet their decarbonization goals with confidence.
Partnering with MSCI for a Swift and Efficient Solution
MSCI has been a pioneer in carbon and climate change analysis since 1990. The company is a leader in climate data and analytics and an acknowledged authority in climate indices (#1 Climate Index Provider by Equity Assets Linked to its Climate Indexes).4
MSCI Climate Paris Aligned Indices are designed as alternatives to familiar, broad equity benchmarks. This is designed to enable clients to decarbonize their portfolios quickly and cost-effectively without the need for extensive research and portfolio analysis.
MSCI Climate Paris Aligned Indices
Paris Aligned Benchmarks (PABs) were first introduced in 2019 as tools to accompany the transition to a low carbon economy by the Technical Expert Group of the European Commission. These indices are intended to help reallocate capital toward a low carbon and climate resilient global economy.
PABs require a 50% reduction in greenhouse gas (GHG) emissions compared with a parent index in year one, then a 7% year-on-year reduction of GHG emissions relative to the fund itself.
MSCI’s Climate Paris Aligned Indices are designed to meet and exceed the EU Paris Aligned benchmark requirements, seeking to decarbonize at an annual rate of 10% to ensure a temperature aligned with 1.5°C (“self-decarbonization”).
The indices have a number of exclusions, including:
PAB activity exclusions which include companies with certain involvement, based on levels of production or revenue:
Thermal coal mining
Oil and gas related activities
Power generation from thermal coal, oil, natural gas
Controversial weapons companies with certain involvement based on levels of production, revenue or ownership
Societal norms and environmental controversy violators
The indices employ an optimization process that seeks to improve the climate profile of their respective parent indices by minimizing exposure to the physical and transition risks of climate change, increasing exposure to sustainable (or green) investment opportunities and aligning to 1.5°C — while maintaining a modest tracking error relative to the parent index and offering low turnover.
The four climate objectives — transition risk, 1.5 °C alignment, green opportunity, and physical risk — are explained below.
The information contained above is for illustrative purposes only.
The indices are rebalanced following semi-annual reviews in May and November each year, at which point they must adhere to 50% reduction in carbon emissions and continued decarbonization.
The indices are aligned with TCFD (Task Force on Climate-Related Financial Disclosures) recommendations, with a substantially reduced carbon footprint (including Scope 3 product and supply-chain emissions). The weights of companies with substantiated reduction targets are elevated and there is a reduction on physical climate risk exposure (based on the MSCI Climate Value-at-Risk model).
Why SPDR for Climate?
SPDR ETFs are sponsored by State Street Global Advisors, the asset management arm of State Street, a structure aﬀording us a heritage of sustainability and signiﬁcant resource to respond to client needs. Across our leading investment servicing, management, research and analytics capabilities, State Street is committed to helping investors understand the Environmental, Social and Governance (ESG) issues that aﬀect the value of their portfolios. We further show our commitment to sustainability as a signatory to the UN’s Sustainable Development Goals, through global environmental goals and incorporation of ESG into the board charter at the corporate level.
As we witness the structural shift in our economies from tangible to intangible value drivers, we recognize that ESG considerations are becoming more important factors for companies and the way they are valued as well as for investors. At State Street Global Advisors, we are committed to combining our ﬁnancial data and analytics capabilities with our investment practitioner perspective to create a new generation of ESG solutions. We provide leading research, analytics and advisory for investors’ ESG needs across asset classes and investment styles.
We believe our asset stewardship activities and ESG scoring model are diﬀerentiating activities in the ﬁnancial world. As a ﬁrm, State Street Global Advisors looks to lead by example and has signed up to reduce carbon emissions — this includes joining the Net Zero Asset Managers Initiative in April 2021 to ensure our portfolios reach net-zero greenhouse gas emissions by 2050 or sooner and set interim targets for 2030.
State Street Global Advisors also has a long history of active asset stewardship and, since 2014, a key focus has been climate change. In 2022, our main board engagement focus is to support the acceleration of the systemic transformations underway in climate change and the diversity of boards and workforces.5 For SPDR, this means that we are not just an indexed investment provider, but that we actively engage with the companies held in our funds to use our voting rights as a lever to eﬀect positive change.
1MSCI, The MSCI Net-Zero Tracker, October 2021. 2Matt Phillips, Exxon’s Board Defeat Signals the Rise of Social-Good Activists, The New York Times, June 9, 2021. 3The World Targets Change: How Investors’ Global Focus on Carbon is Set to Alter the Game, November 2021. https://www.ssga.com/us/en/intermediary/etfs/insights/the-world-targets-change. 4MSCI, as of December 31, 2021. 5CEOs Letter on Our 2022 Proxy Voting Agenda, State Street Global Advisors, January 22, 2022.
Climate VaR Designed to provide a forward-looking assessment of the impacts of climate change on a company's valuation based on the global average temperature under a 1.5 degree Celsius warming scenario compared to pre-industrial levels.
GHG Intensity Measures a company's Scope 1, 2 and 3 emissions relative to its enterprise value including cash.
High Impact Climate Sectors Defined by EU BMR as those sectors that are key to the low-carbon transition.
Low Carbon Transition Score Seeks to identify a company's exposure to and management of risk and opportunities related to low carbon transition.
Net Zero Means that the total greenhouse gas (GHG) emissions being emitted should be lower than or equal to the total GHG emissions being removed or absorbed (ie, no positive emissions). On a net basis, no additional emissions should be released into the Earth’s atmosphere.
The Paris Agreement A binding international treaty on climate change whose goal is to limit the increase in the global average temperature to well below 2 degrees Celsius (preferably 1.5 degrees Celsius) above pre-industrial levels.
Physical Risks Risks attributable to the physical impacts of climate change on companies’ operations as a result of extreme weather events like wildfires, storms and flooding.
Potential Emissions Intensity Represents the sum of a company's estimated carbon emissions assuming the company uses its owned coal, oil and gas reserves relative to the company's enterprise value including cash.
Scope 1 Emissions Direct greenhouse gas (GHG) emissions that occur from sources that are controlled or owned by an organization.
Scope 2 Emissions Indirect GHG emissions generated in the production of electricity consumed by the organization.
Scope 3 Emissions All other indirect GHG emissions that are a consequence of the activities of the organization, but occur from sources not owned or controlled by the organization.
Transition Risks Risks with the transition to a low-carbon economy and may include policy and regulatory risks, technological risks, as well as supply and demand risks in certain sectors.
Weighted Average Green Revenue Represents the weighted average of index constituents' percentage of revenue derived from alternative energy, energy efficiency, sustainable water, green building, pollution prevention, and sustainable agriculture.
Weighted Average Fossil Fuel-Based Revenue Represents the weighted average of index constituents' percentage of revenue derived from the mining of thermal coal (excluding metallurgical coal, coal mined for internal power generation, intra-company sales of mined thermal coal and revenue from coal trading) or its sale to external parties, extraction, production and refining of conventional and unconventional oil and gas, and power generation based on thermal coal, liquid fuel, and natural gas.
The views expressed in this material are the views of SPDR Equity ETF Strategy through the period ended April 11, 2022, and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
This communication is not intended to be an investment recommendation or investment advice and should not be relied upon as such.
Prior to 04/22/2022, the SPDR MSCI ACWI Climate Paris Aligned ETF (NZAC) was known as the SPDR MSCI ACWI Low Carbon Target ETF (LOWC).
Investing involves risk of including the risk of loss of principal.
Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions.
Foreign (non-U.S.) securities may be subject to greater political, economic, environmental, credit and information risks. Foreign securities may be subject to higher volatility than U.S. securities, due to varying degrees of regulation and limited liquidity. These risks are magnified in emerging markets.
Investments in mid-sized companies may involve greater risks than in those of larger, better known companies, but may be less volatile than investments in smaller companies.
Companies with large market capitalizations go in and out of favor based on market and economic conditions. Larger companies tend to be less volatile than companies with smaller market capitalizations. In exchange for this potentially lower risk, the value of the security may not rise as much as companies with smaller market capitalizations.
A non-diversified fund that focuses on a relatively small number of issuers tend to be more volatile than diversified funds and the market as a whole.
Passively managed funds invest by sampling the index, holding a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. This may cause the fund to experience tracking errors relative to performance of the index.
A fund’s incorporation of ESG considerations in its investment process may cause it to make different investments than funds that do not incorporate such considerations in their strategy or investment processes. Under certain economic conditions, this could cause a fund’s investment performance to be worse than funds that do not incorporate such considerations. A fund’s incorporation of ESG considerations may affect its exposure to certain sectors and/or types of investments, and may adversely impact the fund’s performance depending on whether such sectors or investments are in or out of favor in the market.
While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.
The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
The funds or securities referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds or securities or any index on which such funds or securities are based. The Prospectus contains a more detailed description of the limited relationship MSCI has with SSGA Funds Management, Inc and any related funds.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
Standard & Poor's®, S&P® and SPDR® are registered trademarks of Standard & Poor's Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation's financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.
Distributor: State Street Global Advisors Funds Distributors, LLC, member FINRA, SIPC, an indirect wholly owned subsidiary of State Street Corporation. References to State Street may include State Street Corporation and its affiliates. Certain State Street affiliates provide services and receive fees from the SPDR ETFs. ALPS Distributors, Inc., member FINRA, is the distributor for DIA, MDY and SPY, all unit investment trusts. ALPS Portfolio Solutions Distributor, Inc., member FINRA, is the distributor for Select Sector SPDRs. ALPS Distributors, Inc. and ALPS Portfolio Solutions Distributor, Inc. are not affiliated with State Street Global Advisors Funds Distributors, LLC.
THIS SITE IS INTENDED FOR QUALIFIED INVESTORS ONLY.
No Offer/Local Restrictions
Nothing contained in or on the Site should be construed as a solicitation of an offer to buy or offer, or recommendation, to acquire or dispose of any security, commodity, investment or to engage in any other transaction. SSGA Intermediary Business offers a number of products and services designed specifically for various categories of investors. Not all products will be available to all investors. The information provided on the Site is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.
All persons and entities accessing the Site do so on their own initiative and are responsible for compliance with applicable local laws and regulations. The Site is not directed to any person in any jurisdiction where the publication or availability of the Site is prohibited, by reason of that person's nationality, residence or otherwise. Persons under these restrictions must not access the Site.
Information for Non-U.S. Investors:
The products and services described on this web site are intended to be made available only to persons in the United States or as otherwise qualified and permissible under local law. The information on this web site is only for such persons. Nothing on this web site shall be considered a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction.
Before investing, consider the funds' investment objectives, risks, charges and expenses. To obtain a prospectus or summary prospectus which contains this and other information, call 1-866-787-2257, download a prospectus or summary prospectusnow, or talk to your financial advisor. Read it carefully before investing.
Not FDIC Insured * No Bank Guarantee * May Lose Value