Global fund manager launches local climate transition fund

A leading global fund manager has launched a green transition index fund for Australia and New Zealand.

Northern Trust Asset Management has created the NT World Green Transition Index, which excludes companies with fossil fuel reserves, and selects companies that are significantly decarbonised from a carbon emissions intensity perspective, with a positive tilt towards companies benefiting from the energy transition with green revenues and a strong climate strategy.

The strategy, an open-end fund available for investment by Australian and New Zealand institutional investors, has been developed with Cambridge Associates to meet the needs of their clients, Northern Trust Asset Management said.

"Putting all those elements together gives investors a great opportunity in terms of taking on some of those sustainability issues, but also being much more forward looking at positioning the focus onto energy transition," said Scott Bennett, head of quantitative research and client solutions for Australia and New Zealand at Northern Trust Asset Management. "Where we see a lot of demand for this type of product is especially within the charity and endowment space, where they are looking for much more explicit carbon reduction targets, particularly around things like fossil fuels, but up until now haven't been able to pursue those opportunities."

The strategy enables the incorporation of climate change considerations into a rules-based equity solution and revolves around five distinct climate-aware components that aims to hedge the risks, and, importantly, incorporate the investment opportunities of the transition to a low-carbon global economy. The result is a significant reduction in carbon emissions intensity, with Northern Trust Asset Management saying it has an almost 100 % reduction in potential carbon emissions of the strategy against the parent benchmark, MSCI World Index.

Bennett likened the impact of heavy emitting companies to the pareto principle - that the majority of the consequences come from a minority of companies.

"Around 10% of companies make up around 90% of the overall carbon footprint within the MSCI World Index," he said. "That's a very small number of very large emitters, and for the most part, every industry operates closer to average.

"Those securities are targeted in particular sectors such as energy and utilities.  With this strategy, we've focused on the 10% top emitters and we focus on targeting those companies. We effectively reduce emissions within the strategy without having a meaningful impact on overall tracking error."

The strategy also aims to invest in companies that have a higher exposure to green revenues, either through direct service provision or through internal company operations.

"We work with our underlying ESG providers to focus on the green revenues side to establish the proportion of exposure to green revenues, the percentage derived from alternative energy sources, looking at the energy efficiency of different companies as well, and for the assets they own," Bennett said. "On the energy transition risk side, we are also using an MSCI score which looks at a whole raft of different measures of scope 1 and scope 2 emissions and reporting around things like TCFD results as well."

Homing in on green revenue also allows Northern Trust to identify companies that are preparing for, or actively transitioning towards the targets of decarbonization by mid-century, which would qualify them for inclusion in the strategy.

"Those companies could be working very, very hard on the risks they're facing, actually looking at the green revenue is a good way to get better differentiation on that," Bennett said.

The NT World Green Transition Index fund has recently attained certification from the Responsible Investment Association Australasia (RIAA) to meet its environmental, social and governance considerations. RIAA's Responsible Investment Certification recognizes products that align capital with achieving a healthy and sustainable society, environment and economy.

Read more: Northern Trust Asset ManagementMSCI World IndexRIAACambridge AssociatesResponsible Investment Association AustralasiaScott Bennett