Gregory Guerrand : " Our Low Carbon 100 Europe Theam Easy UCITS ETF is a solution for investors who want to decarbonise their portfolio "

Next-Finance : In 2008, THEAM launched Low Carbon 100 Europe Theam Easy UCITS ETF [1], the first ETF on the theme of the reduction of carbon emissions. In the run-up to COP21, the global conference on climate change, institutions are beginning to start more and more initiatives on this subject. The Portfolio Decarbonisation Coalition aims to reduce institutional portfolios’ carbon footprint by USD 100 billion by December 2015. In your view, is this sudden rallying a validation of your strategy?

Gregory Guerrand : Yes, it is. We are currently seeing increased investor awareness of the need to act against climate change. And in the run-up to COP21, BNP Paribas Investment Partners is one of the main international asset managers to have signed the Montreal Carbon Pledge, which was launched on 25 September 2014 at the PRI [2] in Person conference in Montreal. The Montreal Carbon Pledge encourages investors to annually measure and publicise the carbon footprint of their investment portfolio, in accordance with the objectives set by the Portfolio Decarbonisation Coalition (PDC) [3]. The PDC is a United Nations programme that supports the environment, urging investors to reduce the carbon footprint of their portfolios.

On top of the ambition of this coalition of institutional investors to eliminate carbon-intensive companies from their portfolios, we expect regulations to provide incentives to investors do the same in the future. With this in mind, our Low Carbon 100 Europe Theam Easy UCITS ETF, which is indexed to the Low Carbon 100 Europe index, published and calculated by Euronext, is a solution for investors who want to decarbonise their portfolio.

Could you explain to us how the Low Carbon 100 Europe index is constructed?

The Low Carbon 100 Europe index, which was created in 2008, is part of a new generation of financial instruments that reflect the direct impact of carbon restrictions on a company’s financial performance. Its objective is to reflect the financial performance of Europe’s 100 top large-capitalisation companies that have made the greatest contribution to reducing carbon dioxide (CO2) emissions in their respective sectors.

The index is constructed by the independent scientific committee that developed it, which is chaired by Pascal Canfin and composed of academics, non-governmental organisations and environmental experts. This approach chooses the best-in-class in each sector. At the first stage, the specialists short-list and analyse Europe’s 300 largest companies while excluding those with market caps under EUR 2 billion. The short-listed companies are then classified by sector and, within each of these sectors; the committee selects those that emit the least CO2 so as to obtain a representative index of Europe’s 100 largest caps with the smallest carbon footprint.

Remember that the scientific committee’s selection of securities is based on the skills of a data provider specialising in carbon. The index’s composition changes over time, as it is reviewed each year to reflect the efforts companies have made to reduce their carbon dioxide emissions.

What is the method of replicating the index? What is your ETF’s tracking error?

Regarding the replication method, we have opted for a physical replication of the Low Carbon 100 Europe index. And our tracking error between the index and our ETF is relatively low at 0.10% over one year [4] . (Source: THEAM)

The Norwegian sovereign wealth fund recently announced that its new policy of reducing its investments in carbon-related companies could lead it to sell off stakes worth a total of some EUR 6 billion. What impact will this type of strategy have on the market performance of companies with heavy carbon impacts and on those that are more environmentally friendly?

This type of strategy aims clearly to penalise the companies that are least environmentally friendly. The fact that the Norwegian sovereign wealth fund is selling off its stakes in these companies is likely to exert downward pressure on their market performance. Remember that this fund, whose purpose is to invest some of the country’s oil and gas revenues, is the world’s largest.

In addition to clearly marking its commitment to the environment, this initiative positions the Norwegian sovereign wealth fund as a model for all institutional investors worldwide. We therefore expect this type of strategy to provide a boost to companies that focus on sustainable development and the environment, and for it to ultimately have a beneficial impact on their stock prices.

Some institutions have a sector exclusion approach, but you have adopted a best-in-class approach. Why so?

The advantage of the best-in-class approach is to encourage companies in all sectors to work in favour of the environment. Meanwhile, while not excluding a sector, it allows investors to diversify risks well, to avoid sector biases and to tap into any potential upside from the equity markets.

Given investor appetite, would you be able to cope with an increase in assets under management (AuM)? Is there a maximum capacity for your ETF? What about liquidity and the Ongoing Charges?

We would have no problem accommodating an increase in AuM, as all the index companies are large caps, i.e. stocks with a market capitalisation exceeding EUR 2 billion. By definition, these are highly liquid investments, as large caps have a large number of shares in issue on the equity markets.

We see that as an additional advantage for investors. They are concerned about their environmental commitment while also keeping a constant eye on the risks involved in their investments, liquidity risk in particular. Given the daily liquidity of our ETF, which is quoted continuously on the Paris Bourse from 9am to 5:35pm, we estimate its maximum capacity at about EUR 10 billion. Its ongoing charges is estimated at 0.6% annually. (Source: THEAM)

What is the performance of the Low Carbon 100 Europe index? What about its volatility?

Over the past five years, the Low Carbon 100 Europe® index has outperformed the STOXX Europe 600 equity index, for example, by 13.6% [5], with a correlation close to 1 (0.98) and a comparable level of volatility. (Source: THEAM)