New ETF makes a big bet on cleaning up the environment

A major ETF provider hopes the grass will get greener for climate-related funds in the United States.

Asset manager DWS launched the Xtrackers MSCI USA Climate Action Equity ETF [USCA] this month. It’s designed to mimic a growing investing trend in Europe that’s tied to limiting emissions rather than following broad environmental, social and governance practice.

“Institutional clients are looking to hone in specifically on climate as a relevant topic,” Arne Noack, the firm’s head of systemic investment and solutions, told “ETF Edge” on Monday.

According to the DWS news release, the ETF tracks the performance of the MSCI USA Climate Action Index and is comprised of large and mid-cap U.S. companies leading their industries in achieving positive impact on climate change.

Plus, the company website shows the ETF has amassed more than $2 billion in total net assets since its listing on April 4. Its holdings include Microsoft, Apple, Amazon, Nvidia and Alphabet.

To find the companies that yield the best results, Noack notes the MSCI index measures emissions levels of each company and ranks them within each sector. From there, the index excludes the companies that perform the worst, he said.

The measurements follow the Greenhouse Gas Protocol’s Corporate Standard. It classifies a company’s greenhouse gas emissions into three categories: Scopes 1 and 2 account for emissions produced from a company’s owned and controlled sources. Scope 3 accounts for those produced by all activities from its unowned and uncontrolled sources, like customers and suppliers.

Scope 3 is often considered the hardest to track and manage as a result.

“Regulation straddles the line of having to be precise and specific, and also practical,” Noack said. “Certain assumptions have to be made in order to measure Scope 1, 2 and 3.”

But this U.S.-based ETF may pose a risk for investors. Securities and Exchange Commission Chair Gary Gensler’s recent push to require public companies to disclose their exposure to climate change risks is facing blowback from lawmakers and organizations, which have threatened lawsuits if the disclosure is finalized.

However, Noack contends there may be a silver lining to this.

“Where regulation becomes useful is … to make sure that all disclosures are harmonized as much as possible [and] meet that great objective to meet reality,” Noack said.

USCA is up almost 1% since its launch earlier this month.