Adhering to the 1.5℃ global temperature control objective, Franklin S&P 500 Paris Aligned Climate UCITS ETF provides diversified US equity exposure. The Paris Agreement is an international treaty on climate change, adopted in 2015. It covers climate change mitigation and adaptation, providing a single and clear direction to state and nonstate actors for the longer term. This ETF itself has been classified as Article 9 under the Regulation on sustainability related disclosures in the financial services sector (EU) 2019/2088. In other words, they aim to adopt an ESG integration approach, having binding environmental and/or social characteristics and a clear sustainable investment objective.
However, based on the available information from their website, it can be seen that their ultimate purpose is not to make an effort to achieve sustainability, but to reduce ESG risks as much as possible whilst maximising returns for their clients. In general, little information is provided regarding how they make their investment decisions and how their strategies are designed to comply with the Paris Agreement target. Hence, the overall rating of this fund is 0.7 planets. For those who are actually trying to make a contribution for environmental protection, this fund is not highly recommended.
This fund is owned by the American multinational holding company, Franklin and Templeton, managing a total net asset worth of $113.09 Million USD. The Top Ten Holdings of this fund are (NAME, percentage of portfolio):
1) MICROSOFT CORP, 6.00%; 2) APPLE INC, 4.83%; 3) ALPHABET INC, 4.51%; 4) AMAZON.COM INC, 4.04%; 5) NVIDIA CORP, 2.57%; 6) UNITEDHEALTH GROUP INC, 1.95%; 7) VISA INC, 1.93%; 8) BANK OF AMERICA CORP, 1.84%; 9) MASTERCARD INC, 1.74%; 10) PROCTER & GAMBLE CO/THE, 1.53%.
All the companies listed in the holdings are in the information technology, healthcare, and financial sectors. This reflects a degree of diversity in the fund’s investment, but big companies still dominate. More importantly, although the majority of these companies have developed their net-zero and ESG strategies, many of them have been questioned in the past regarding their ESG performances. For instance, Amazon has been filed for antitrust violation and Apple has been questioned about their carbon emission in product manufacturing and transportation. On top of that, looking at the sector composition of this fund, there is no inclusion of any sustainability and renewable energy related sector. From their holding composition, the degree to which this fund is actually attempting to contribute to the Paris Temperature Target remains questionable.
In general, little information is provided regarding how they make investment decisions. In fact, from the webpage and factsheet of this ETF, there are no details about their selection process at all. Given the high degree of information disclosure in many other sustainable ETFs nowadays, their lack of transparency can largely reduce consumer confidence and negatively impact their reliability in terms of making responsible investments. Most importantly, without any of this information, it is very hard to tell whether the ETF is actually trying to make green investments or doing greenwashing. This again makes their score very low.
Given the lack of details about their selection process, the most useful information for this section is perhaps this fund’s underlying index. It is stated that this fund attempts to closely track the performance of the S&P 500 Net Zero 2050 Paris-Aligned ESG Index-NR (the Underlying Index). This is an index designed to measure the performance of eligible equity securities from the S&P 500, selected and weighted to be collectively compatible with a 1.5ºC global warming climate scenario at the index level. However, there is no clear indication of how exactly the Paris Agreement target is broken down or incorporated in any of their investment decisions. For example, is there one uniform standard imposed on firms in terms of carbon footprint reduction? Are there specific requirements for firms to establish an ESG framework? If all these details can be made more clear, this fund could be much less suspicious of greenwashing.
According to the Morningstar Sustainability Rating, a measurement of how well the portfolio holdings are managing their ESG risks, although the overall sustainability rating of this fund is relatively high, their Corporate Sustainability Score falls below the global average. Looking at the three pillars of ESG, the social and governance risks of this fund are much higher than environmental risk, but the reason for these rankings is not provided.
Although the fund managers and top holdings are disclosed, not much detailed information has been provided. It can be seen that this fund is run by two experienced financial actors, one male and one female, but there is no evidence showing their specialisation in ESG or sustainability related investment. Although this is perhaps a common thing in the sustainability investment sector, this fund can certainly do better in terms of ESG proficiency. The record of its diversity and inclusion is not good as well. In 2018, this fund set a goal of having 28-33% of female employees in senior management roles by 2022, but has failed to achieve it. Overall, this ETF still has a long way to go in all aspects of E, S, and G.