Evolve unveils carbon neutral alternative to investing in major indices

ETF provider files preliminary prospectus for 'clean beta' solutions that don’t reduce investable universe

Evolve unveils carbon neutral alternative to investing in major indices

Evolve Funds is set to provide investors with a new twist on ESG – and a world first – with two ETFs that provide a “clean beta” solution to investing in the S&P/TSX 60 and the S&P 500.

The company announced yesterday that it has filed a preliminary prospectus with the Canadian securities regulators to bring carbon neutrality to these traditional indices through the Evolve S&P/TSX 60 CleanBeta™ Fund (SIXT) and the Evolve S&P 500 CleanBeta™ Fund (FIVE). Both are designed to provide investors with the performance of the respective indices while offsetting the carbon footprint of the securities in the portfolios.

Raj Lala, president and CEO at Evolve, told WP this will be achieved by relying on a carbon footprint calculation provided by S&P Dow Jones via Trucost, a division of S&P Global. This will determine the carbon exposure of the companies in the indices. Using a variety of strategies, including purchasing and retiring carbon credits, the ETFs will then neutralize the full carbon footprints.

Lala told WP that while the institutional and retail demand for ESG investing is clear, this focus narrows the overall universe of investable companies because of carbon neutral requirements or other elements across the ESG spectrum, which in turn changes your return profile.

He said: “So we came up with this idea. What if we could take a carbon footprint calculation of some of these indices and then go and purchase carbon offset credits to offset that entire carbon footprint, and then deliver to investors a carbon neutral version of an index that they already own.”

S&P, which hadn’t given out a license for the TSX 60 in 11 years, liked the idea and gave it the green light. For example, on the TSX 60, for every million dollars that's invested there is a carbon emission count of 84 metric tons. That figure is then used to offset the emission and create a neutral investment.

Lala added: “It’s a pretty simple product. We’re essentially delivering to investors a carbon neutral version of what they're already buying, if they're buying the TSX 60 or the S&P 500. That’s where this has a place because I would estimate that about 60% of the equity exposure in Canada is tied to either of those two indices, so you cast a very wide net.”

Elliot Johnson, CIO and COO at Evolve, said that investors have been searching for solutions to meet their objectives while still satisfying their environmental responsibilities. He said: “Greenhouse gas emissions have become a global challenge, with C02 contributing over 30 billion metric tons of emissions a year. While many companies are striving to reduce their carbon footprint, scientists believe we are not moving fast enough."  

Lala added that in a perfect world, these news ETFs don’t exist because all companies, countries and companies are carbon neutral. However, he believes carbon credits can help offset that footprint over the next 20-30 years until we get to a fully neutral environment.

He said: “Some people might say we’re still investing in companies that are emitting a lot of carbon dioxide into the atmosphere because you're not changing the companies  we’re investing in. The answer to that would be, ‘yes, you're correct’.

“But the plan is that we're going to be buying credits in companies that are focused on natural solutions or other carbon capture strategies to reduce our overall emissions and offset it. If the credits that we buy can incentivize a landowner to plant a million trees instead of converting their land into a parking lot, then I think we've done something good here.”