Fool: How did you come up with this carbon-neutral ETF idea?
Evolve: Carbon dioxide is the primary contributor (80%) of our world’s greenhouse gases. Investors are now demanding that countries and companies work to reduce these emissions; however, this cannot take place overnight. About a year ago, a large firm approached us to create a carbon-offset-credit ETF; however, we felt it might be too esoteric.
A few months later, a light bulb went on — and we said, “what if we could use carbon credits to offset the carbon footprint of traditional indices?” Carbon credits represent a removal or avoidance of carbon emissions in the environment. So, our solution would be to provide investors with an index that they would typically own but delivers a carbon neutral version of it — or CleanBeta™, which we’ve trademarked.
We approached S&P with the idea, and they granted us the first licence on the S&P/TSX 60 in over 11 years and also granted us the licence for the S&P 500.
Fool: How does the fund work? Walk us through the simple mechanics of the process.
Evolve: We’re pleased to have launched the world’s first carbon-neutral ETFs based on the performance of the following traditional indices: S&P/TSX 60 and S&P 500. The Evolve S&P/TSX 60 CleanBeta™ Fund (SIXT) and the Evolve S&P 500 CleanBeta™ Fund (FIVE) have been developed to satisfy a number of investment and operational challenges for advisors and their clients. These funds provide investors with a way to decarbonize the core of their portfolio.
S&P owns a company called Trucost, which performs carbon-emission analysis and calculations on about 15,000 companies on annual basis. Trucost is considered one of the top carbon calculators in the world. Trucost looks at direct and first tier indirect emissions — very similar to Scope 1 and 2 emissions and relies on data from the Carbon Disclosure Project or CDP. Trucost provides a calculation for metric tons of emissions per $1 million invested. For example, as at the end of April, the S&P/TSX 60 currently has about 83 metric tonnes of emissions per $1 million invested and S&P 500 is about 52 metric tonnes/million.
Based on an average cost of $20/per offset credit, that equates to 17bps of costs to offset the S&P/TSX 60 Index (SIXT) and 10bps to offset the S&P 500 (FIVE). The funds will purchase California Compliance Offsets (CCOs), which are among the highest-quality carbon credits available. The credits will be purchased and retired immediately and will not be an asset of the fund.
These credits work out to a current cost of 3.4 cents per $20 share on the S&P/TSX 60 and 2.2 cents on the S&P 500, as at April 30, 2021. So, investors will receive the exact performance of the Index less fees. Ultimately, investors receive a carbon neutral version of the S&P 500 or S&P/TSX 60. There is no other screening, nor are there any changes to the indices.
Fool: What is the target audience for these products?
CleanBeta takes a unique approach and simple solution to decarbonize the core of investor portfolios. There has been significant interest from institutional investors, including corporate pensions, university endowments, and family offices.
In Canada, over the next five years, approximately $700 billion of wealth is expected to transfer from one generation to the next. As a result, many advisors are beginning to incorporate ESG investing in their practice, as younger investors are focused on ESG principles and looking to make a climate impact with their investments.
These funds are ideal for investors looking for a cost-effective carbon-neutral solution, care about social issues, ESG, and climate change.
