Climate change remains an ever-present looming elephant in the room, and the Russia-Ukraine war highlights concerns around the ongoing energy crisis and energy transition. There have been a bevy of funds that have sprung up around the transition to a net-zero emissions way of life, from carbon credits to divesting from the worst offenders, but KraneShares has taken a unique approach in the latest fund added to its climate suite, the KraneShares Global Carbon Transformation ETF (KGHG).
“This race to ’net zero’ is beginning to shift the playing field of our energy economics, with the economic activity from climate-related policies resulting in the largest capital cycle the world has ever seen—affecting at least 20% of the global economy,” writes Roger Mortimer, portfolio manager for KGHG, in a recent report on the emissions and energy transformation. “Any slippage in the progress toward our climate objectives will lead to these policies becoming only more pervasive and aggressive.“
KGHG does the opposite of divestment in that it seeks to find the companies that will lead their industries in the transition to net-zero emissions; this means that the fund invests in some of those very companies that other ESG funds might screen out. The transition to a net-zero global economy could mean that fossil fuels will not cease to be an energy source, but that their contribution will be reduced, their processes refined, and their emissions most likely accounted for with allowances or carbon capture technologies.
“Carbon transformation spending will drive the biggest capital cycle the world has ever seen. McKinsey & Company estimate that the total investment required to achieve net zero by 2050 is $275 trillion, with annual capital spend on energy infrastructure expected to jump more than 50% from current levels," according to Mortimer.
The Investing Potential of Decarbonization
The fund seeks to capture the true potential within the carbon transition through its focus on companies from within industries that are traditionally some of the highest emission offenders but that are on the precipice of transitioning to renewable technologies. These companies that are set to disrupt their industries would benefit greatly from being leaders in the transition, as the cost of carbon emissions is only going to become more expensive, cutting into the bottom line as demand decreases for high emissions offenders.
“Companies leading in the decarbonization of their industries may experience faster growth that they have historically and may be re-valued over time as they are sought out by ESG investors; and companies in the decarbonization value chain may experience an expansion of demand for their products and services," writes Mortimer.
KraneShares sees three core drivers of decarbonization that will continue moving the process forward and adding pressure to industries: an increase in policy reforms targeting emissions, inflows that continue to grow over time into climate-themed and impact investments, and costs that continue to decrease for renewables as technological innovations continue.
KGHG is an actively managed fund that invests globally across market caps in sectors in carbon emissions reducers that are taking active steps to reduce their carbon footprints and services or the carbon footprints of other companies. This also includes companies contained within the supply chain of the carbon-reducing companies as well as companies that are growing their businesses with companies that are materially reducing carbon emissions.
The fund utilizes proprietary, fundamental, bottom-up analysis using information disclosed by companies as well as third-party data. Companies invested in include Contact Energy, a New Zealand electrical and natural gas company, at 3.54%; Reliance Industries Limited, an Indian conglomerate energy company, at 3.34%; and Fortescue Metals, an Australian iron ore company, at 3.16%.
KGHG carries an expense ratio of 0.89%.
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