KraneShares recently hosted a Bay Area Innovation Forum at the end of April to discuss a variety of topics that impact investors, both in current environments and looking ahead. Of the topics discussed, ESG and climate investing were a large focus. Luke Oliver, managing director, head of climate investments, and head of strategy for KraneShares, hosted a discussion on the topic and the importance of investing with a focus on climate going forward.
Climate policies and a focus on decarbonization and climate risks are going to be increasingly important in the years ahead. Companies are already responding to increased pressures from shareholders as well as current and looming regulatory pressures.
“We know that more and more, policy is going to drive forced internalization of the negative externalities that are being created by companies. We see that already via cap-and-trade schemes as one example,” says Justina Lai, chief impact officer for Wetherby Asset Management.
Roger Mortimer, portfolio manager of the KraneShares Global Carbon Transformation ETF (KGHG ), believes that the world is on the cusp of one of the largest capital cycles in history with the transition of the energy sector, particularly since energy is a fundamental keystone of economic growth. Energy demands worldwide are anticipated to grow 50% by 2050 and 80% of energy is currently derived from fossil fuel sources.
“That entire construct is completely at odds with the reality of climate change and policymakers are unifying very quickly around this idea that we are going to put a price on climate change that gets included in the externalities of the economics of everything that uses energy,” says Mortimer.
These policies will mean a total transformation of the “dirty industries” that currently make up around 20% of global GDP and will require a level of investment that is unparalleled.
“This is essentially taking everything built since the Industrial Revolution and if it is high emitting, we’re going to replace it and that is both a significant capital burden but has tremendous investment opportunity and tremendous growth potential that arises from it,” Mortimer explains.
Why Sustainability Has Replaced ESG
Wetherby currently doesn’t believe that climate change is accurately priced into markets and companies, and that the urgency of transition is one that they approach on a holistic scale, taking into account the broad-reaching implications in areas such as social impacts and governance, according to Lai. Investing around climate is something that needs to take the whole picture into account to best understand the risks.
The approach to ESG and ESG investing has evolved, with the original popular approach of divestment giving away instead to investment, engagement, and a focus on impact for many funds.
“We think about ESG in terms of the fundamental concept of sustainability, that if your business is inherently unsustainable, it’s not going to be worth as much,” Mortimer says. “We’re really focused on the financial opportunity that is arising from a very rapidly changing environment, both at a regulatory level and a customer level.”
KraneShares offers a bevy of climate-related products that seek to capture the transition to a zero-emission world by 2050, whether through a focus on carbon emissions or the transition of industries.
KraneShares’ carbon allowances suite of funds includes the KraneShares Global Carbon Strategy ETF (KRBN ), an ETF that invests in carbon allowances futures globally from the EU, California, RGGI, and the U.K., the more targeted KraneShares European Carbon Allowance Strategy ETF (KEUA ) and the KraneShares California Carbon Allowance Strategy ETF (KCCA ). The newly launched KraneShares Global Carbon Offset Strategy ETF (KSET ) is the first U.S.-listed ETF offering investors exposure to the voluntary carbon markets.
For an approach that targets transitioning companies, KraneShares Global Carbon Transformation ETF (KGHG ) seeks to capture the true potential within the carbon transition by focusing on companies from within industries that are traditionally some of the highest emission offenders, but are on the precipice of transitioning to renewable technologies.
For more news, information, and strategy, visit the Climate Insights Channel.