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The NTZO Failure: A new precedent in Green ETF Investment?

In early November 2021, the ‘MSCI Global Climate Select’ exchange-traded fund (ETF) was unveiled at the prestigious Glasgow COP26 summit. Traded under the title ‘NTZO’, the intention of the fund was to exclude companies with fossil fuel use entrenched in their production processes, whilst boosting holdings in companies with low carbon emissions. Considering the meteoric growth in demand for ESG conscious investment opportunities, paired with the institutional backing of the NTZO by the UN, one would expect the fund to have taken off in a similar manner as many other major Green ETFs. However, only 3 months after the COP26 unveiling, the fund is on the brink of failure with only a measly investment pool of $2m. With such high ambitions, one has to question how such a well-supported fund could stimulate so little demand, and whether the promises of investors and fund creators alike are merely fictitious. Seeing as every year the number of ETFs being shut down increases, with 1 in 20 having been closed down during 2021, are fund managers really developing targeted products, or are they simply seeing what sticks? If the latter approach is the case, Green Funds are at a high risk of becoming obsolete, serving as a façade for investors trying to upscale their ESG commitments. In this regard, one has to consider how Green ETF Funds can become more accountable, whilst also backing up their purpose with investor confidence and cash.

The Downfall

Looking at the isolated case of the NTZO, the simple explanation for its failure is a fundamental lack of capital. However, in reality, the fund failed due to a poor administrative structure, and a lack of commitment from the fund-makers to invest in seed capital. This not only highlights the current weakness in corporate-cooperation projects facilitated by the public sector, but also the general weakness of Green funds in providing an adequate investment tool for constructively mitigating climate change. 

The fund was formed by the GISD group (Global Investors for Sustainable Development), a consortium of 30 global companies, designed to tackle the UN’s sustainable development goals. Inherently, with members such as Bank of America (BofA), Citigroup and Santander, it would appear unfathomable for there to be a lack of available capital to use as a seed for growing the volume of long-term institutional capital. However, with these large companies issuing a proviso that their investment could not account for more than 25% of the fund, or 5% in the case of Santander, the relatively large pledges of $50m from BofA and $12.5m from CitiGroup could not be realised without extra investment from different avenues. Inherently, due to the proportions agreed by each of the institutions, a stalemate arose where no company would want to make the first move, out of fear that their investment would constitute more than the agreed proportion due to a lack of extra investment. As put by Sudip Thakor, an investor in the fund, it was merely a case of firms “going through the motions”, upholding their commitment to GISD whilst reducing any individual accountability. This has led to external investors describing the GISD as a “facade”, which merely pretends to care about global warming (Jim Healy).

The Danger

The notion of firms simply pretending to care about climate change is by no means exclusive to the failure of NTZO, with there being a growing trend of greenwashing in ETF products. Unlike the case of NTZO, where an ecologically beneficial fund failed, the larger issue is that of ecologically dubious Green Funds succeeding. This relates to how lots of Europe’s most popular climate funds have done almost nothing to avoid carbon emissions when compared to benchmark indexes with no environmental focus. Given that ESG assets currently exceed $35tn according to Bloomberg Intelligence, one has to be concerned as to how many of these assets have a real and un-inflated impact on carbon footprint. Empirically speaking, this gulf in ecological results has been proven by InfluenceMap, who from a pool of major asset managers, found that less than half have created funds that achieve any measures of the Paris Agreement on climate change. 

Looking outside the Green ETF space, there is also a dangerous lack of asset managers integrating coal exclusion policies into their portfolio decisions. According to Reclaim Finance’s analysis of 9 of the largest global asset managers, less than 3% of their collective $13tn in passively managed investments have any coal exclusion policies. Such a lack of ecological concern is derived from the fact that asset managers tend to outsource decisions about the design of their indexing funds to third parties such as S&P Global and MSCI. Moreover, even though asset managers such as Vanguard participate in agreements such as the Net Zero Asset Managers Initiative, they duck accountability by devolving their commitments to the boards of polluting companies in their portfolio. This results in any improvements in reducing fossil fuel consumption taking longer than if they simply divested.

The Recipe for a Successful Green Fund

When looking at the NTZO and the ETF market as a whole, there seems to be multiple failures that prevent Green ETFs and indexed ETFs from achieving noteworthy emission reductions. Despite this, there is hope that with a high level of audit and portfolio maintenance, asset managers will be forced away from greenwashing characteristics. Inherently, in order to achieve maintenance, there has to be an uptake in more active approaches to fund management, where firms can confidently target exposure to carbon emissions. DWS’s ‘Invest ESG Climate Tech Fund’ shows this, as their moves to sell positions in Tesla whilst buying shares in turbine manufacturer Ebara Corp., actually reduced their carbon exposure. 

Finally, when related back to NTZO, there has to be a greater confidence in corporate-cooperation funds, with firms being incentivised to plant the first seed investments. Inherently, this not only requires a mechanism that ensures a first-mover advantage, but a far more robust fund design that stimulates demand in the capital markets. Hopefully GISD Group’s next endeavour will deliver on the promises that made the NTZO an exciting, but flawed, ESG prospect.

Sources

https://www.ft.com/content/84196790-2030-44d7-988c-b6e3408f9b4b

https://www.ft.com/content/8ee2ac80-9025-4dbb-bd1c-b33a86e87549

https://www.bloomberg.com/news/articles/2021-11-24/top-selling-climate-funds-fail-to-deliver-on-carbon-emissions

https://www.etfstream.com/features/the-flaws-of-climate-etfs/

https://www.ft.com/content/7e9b9017-4c72-43b3-a4c4-98e6d3b06111

https://www.etf.com/sections/features-and-news/are-climate-etfs-based-empty-promises?nopaging=1

https://www.etf.com/sections/features-and-news/are-climate-etfs-based-empty-promises?nopaging=1

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