Product Insights

ZGRN: Capital Alignment to Fight Climate Change - February 2022

Management Fee: 0.25% Risk Rating: Medium

Feb. 10, 2022

Alignment is a noun which implies something is in proper working condition, that there is a synergy between entities. Companies and sports teams want their people to be aligned to achieve objectives and factories want their machines to be properly aligned to ensure high production standards and to minimize waste. Alignment ensures energy is expended in an efficient manner to optimize performance.

Climate change is no longer a divisive subject; so many people have been affected by severe weather conditions across the globe. Efforts to combat climate change through environmental alignment have been signed into an international treaty, formalized in the Paris Agreement in 2015. The treaty is legally binding on the 196 signatories, aligning their policies to minimize global warming to less than 2˚C, ideally limited to 1.5˚C.

The initiative has spurred governments and industries to combine their efforts to push economies through a transitionary phase, away from traditional carbon and fossil fuels towards alternative and renewable energy sources. There will be winners and losers in a transitional economy, with some traditional or conventional energy sources becoming stranded assets, a concept which adequately describes the shift from brown towards green revenues.

Supporting this initiative, the Financial Stability Board formed The Task Force Climate-related Financial Disclosures (TCFD), which established guidelines for companies to report their exposures so investors could evaluate environmental risks to align their Capital accordingly.

MSCI has been an industry leader in constructing Responsible Investing and ESG indices, measuring and evaluating reams of data to create benchmarks which allocate towards companies whose business models and practices align with objective standards. Their ACWI Paris-Aligned Climate Equity index incorporates TCFD reporting and seeks to meet or to exceed the objectives defined in the Paris Agreement.

The graphic below outlines some of the steps followed in the MSCI ACWI Paris-Aligned Climate Equity index methodology:

Unlike broader RI or ESG mandates, this is a climate change index which measures scope 1, 2, & 3 emissions and their physical weather impacts and weights towards Green revenues. The index minimizes Tracking Error by maintaining +/-5% weights to the sector and countries of the parent index (NB – carbon-intensive energy sector is excluded). Being an ACWI – All Country World index, it covers 23 Developed and 25 Emerging Markets, making it suitable as a Core Global Equity holding or as a complementary exposure.

In comparison to other climate approaches, the MSCI ACWI Paris-Aligned Climate Equity index provides the most comprehensive exposure to meet climate objectives.

The table below shows how a climate specific methodology enhances outcomes for Institutions who want to make a climate impact, minimizing emissions and their intensity in a company’s revenues, raising the transition and the Physical Climate Value at Risk measures:

Tracking Error01.41
ESG Score6.47.46.6
Environmental Pillar Score66.66.6
Carbon Emissions (t CO2e/$M Invested)804411
Carbon Intensity (t CO2e/$M Sales)19812137
Weighted Average Carbon Intensity (t CO2e/$M sales)1529044
Low Carbon Transition Score6.26.26.8
Physical Risk Climate VaR-5.1-4.7-2.9

Source: MSCI ESG Research, December 31, 2021; BMO Exchange Traded Funds listed ZGRN on the TSX January 272022.

Contact your BMO ETF Specialist for more information.

Erika Toth: Erika.​[email protected]​bmo.​com, (514) 358-2310
Dan Stanley: Daniel.​[email protected]​bmo.​com, (416) 418-2354
Laura Tase: Laura.​[email protected]​bmo.​com, (647) 531-8769
Mark Webster: Mark.​[email protected]​bmo.​com, (604) 562-2851

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