Best Low Carbon ETFs – How to Select and Invest in Low Emission ETFs

Published by Fernando on

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Low carbon ETFs are an important element when it comes to sustainable investing. When well designed, low carbon ETFs exclude companies that have high emissions or will potentially generate high carbon emissions in the future, helping investors to reduce their portfolio carbon footprint.

Intro

So you are aware of the urgency of climate action (SDG 13), read our post about Portfolio Carbon Footprint, and would like to invest in low carbon ETFs to reduce your footprint and help mitigate climate change?

However, when looking for low carbon ETFs you found a myriad of options and is not sure of which ETF to buy. Then let us break down and compare the low carbon ETFs options available in North American and European markets.

Low carbon ETFs aim to select stocks with reduced carbon emissions

What are low carbon ETFs?

Low carbon ETFs are exchange trade-funds that have as main strategies to invest in companies that have lower exposure to GHG emissions, in terms of carbon emissions and fossil fuel reserves. This means that low carbon ETFs will overweight companies with existing and potential low carbon emissions per sale or market cap, while minimizing the tracking error relative to the correspondent parent index.

Low carbon ETFs can also be called fossil fuel free ETFs or climate ETFs. The first two types of ETFs are similar and focus on reducing the GHG (greenhouse gases’ emissions) of a portfolio. While climate ETFs have a broader focus and try to mitigate other aspects of climate change, such as biodiversity, pollution, and waste.

Do low carbon ETFs replace ESG ETFs?

Low carbon ETFs do not fully replace ESG ETFs. They represent a portion of the ESG scope since low carbon ETFs are only addressing one part of the ‘E’ (Environment) in ESG. However, being carbon emissions the most important driver of climate change, it is expected that low carbon ETFs have their dedicated sub-group of ETFs.

Investors need to be careful when investing in pure low carbon ETFs and need to be sure of how those ETFs are represented in their overall sustainable investment portfolio. We will see that some low carbon ETFs, despite having an excellent carbon footprint, are not performing well on other ESG criteria, such as Social and Governance issues. So beware of low carbon ETFs that are not sustainable.

The best low carbon ETFs

We will divide this section based on ETF domicile. We start below with ETFs for US-based investors.

If you are a EU-based investors, click here to jump to low carbon ETFs domiciled in Europe.

Low carbon ETFs for US-based investors

When looking for low carbon ETFs domiciled in the US, we can use the excellent ETF screener from FossilFreeFund.org.

The first thing we notice when searching for low carbon ETFs (or fossil fuel free or climate ETFs) is that the options are somewhat limited for US investors. Only 8 ETFs were found:

NameTickerNet assets (mUSD)TER (%)Fossil fuel gradeCarbon intensity
(tCO2/$1M revenue)
Nuveen ESG Large-Cap Growth ETFNULG3450.35%A - low carbon etfs17.6
Nuveen ESG Mid-Cap Growth ETFNUMG1930.40%A - low carbon etfs20.8
Change Finance US LgCp FossilFuel Fr ETFCHGX220.49%A - low carbon etfs27.2
US Vegan Climate ETFVEGN280.60%A - low carbon etfs30.7
SPDR® MSCI ACWI Low Carbon Target ETFLOWC680.30%C - low carbon etfs52.0
iShares MSCI ACWI Low Carbon Target ETFCRBN4790.20%C - low carbon etfs53.3
SPDR® S&P 500 Fossil Fuel Rsrv Free ETFSPYX6840.25%C - low carbon etfs144.6
VanEck Vectors Low Carbon Energy ETFSMOG1650.62%B - low carbon etfs124.7

In the list we have two tiny ETFs with less than USD 30 million in assets, Change Finance US Large-Cap Fossil Fuel Free ETF (CHGX) and US Vegan Climate ETF (VEGN). Two ESG ETFs from Nuveen (NULG and NUMG) focused on growth. Two ETFs following the same index: MSCI ACWI Low Carbon Target (LOWC and CRBN). One ETF free of fossil fuel reserves (SPYX) and an ETF focused on the low carbon energy sector (SMOG).

For the next analysis, we will remove VanEck Vectors Low Carbon Energy ETF (SMOG) from the list, due to its single sector exposure. Below we look in detail into each one of the 7 diversified low carbon ETFs:

Analysis of US-based low carbon ETFs

Nuveen ESG Large-Cap Growth ETF (NULG)

NULG tracks the TIAA ESG USA Large-Cap Growth Index, which follows strong ESG criteria, targets low-carbon companies and excludes companies in controversial business. Established in 2016 and with an attractive TER of 0.35%, NULG has the lowest carbon footprint in the list, with only 17.6 tCO2/$1M revenue. NULG is not only an attractive low carbon ETF but also a good ESG ETF option, with a high MSCI ESG score of ‘AA’. The only concern is NULG’s grade ‘F’ in military weapons, due to its exposure to Teledyne Technologies Inc.

Nuveen ESG Mid-Cap Growth ETF (NUMG)

NUMG has a similar profile as NULG, including the same foundation year and a slightly higher TER of 0.40%. The carbon footprint is slightly higher as well, at 20.8 tCO2/$1M revenue. It has an MSCI ESG score of ‘AA’ and some exposure to Teledyne Technologies Inc. NUMG receives a ‘D’ from FossilFreeFunds in gender equality, mainly due to its exposure to Snap Inc. and Copart Inc.

Overall it is a good low carbon ETF, despite being limited to US-based mid-cap companies.

Change Finance US Large-Cap Fossil Fuel Free ETF (CHGX)

Despite the “fossil fuel free” in the title, CHGX is an ESG ETF with strong selection criteria. It tracks the Solactive US Large & Mid Cap Index and then applies 50 ESG criteria to exclude undesired holdings. Among the criteria, CHGX excludes fossil fuel operators, producers, and consumers; producers of nuclear power, GMOs, military weapons, or pesticides; and companies with a history of controversial business practices (human rights, labor rights, environment, or business malpractice).

CHGX was established in 2017, has a TER of 0.49%, and despite the low volume of assets under management, it has one of the best overall ESG scorings according to FossilFreeFunds.

US Vegan Climate ETF (VEGN)

VEGN is the second smallest in the list with only USD 28 million of assets. It is the only vegan ETF out there. It tracks Beyond Investing US Vegan Climate Index, which selects holdings based on ESG criteria, focuses on animal-friendly companies, and aims to reduce the use of resources. It has an MSCI ESG score of ‘A’ and a carbon footprint of 30.7 tCO2/$1M revenues.

However, the list of top 10 holdings is not that impressive. It includes, among others, Apple, Facebook, Nvidia, Microsoft, United Health, and Visa, resulting in a heavy allocation of 55% to the technology sector.

SPDR® MSCI ACWI Low Carbon Target ETF (LOWC) and iShares MSCI ACWI Low Carbon Target ETF (CRBN)

Two of the most popular low carbon ETFs, and the only options with global exposure on the list, are LOWC and CRBN, from State Street and BlackRock, respectively. They were established in 2014, within days apart from each other. Both track the MSCI ACWI Low Carbon Target Index, being the only difference among them the slightly higher TER of 0.30% for LOWC when compared to 0.20% of CRBN. Both ETFs have carbon footprints around 50 tCO2/$1M revenue and FossilFreeFund grade of ‘C’.

LOWC and CRBN are not fully fossil free, each one has around 5% of the assets invested in fossil fuel companies, including Berkshire Hathaway Inc., Schlumberger Ltd., Mitsui & Co Ltd., and NextEra Energy Inc. Those low carbon ETFs are not ESG role models either. They accumulate controversies by investing in companies that have businesses related to deforestation, weapons, and tobacco.

SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX)

The largest ETF in the list with USD 683 million of assets under management is SPYX. It was established in 2015 and offers a partial and limited solution to a full-fledged problem (climate change). Tracking the S&P 500 Fossil Fuel Free Index, SPYX ETF only excludes companies that have fossil fuel reserves. Fossil fuel producers and consumers are still allowed in the index. The consequence is a high carbon footprint of 144.6 tCO2/$1M revenue and 5.3% of the assets allocated to fossil fuel companies.

SPYX is a disappointing ETF when it comes to sustainable investing. It does not properly address carbon emissions, neither any other ESG issue.

Low carbon ETFs for EU-based investors

When looking for low carbon ETFs domiciled in Europe, we can use the ETF screener from justETF.com.

In Europe, we find a much more diverse environment of low carbon ETFs, mainly composed of climate change ETFs and SRI/ESG ETFs with low carbon footprints. Most European ETF providers, such as iShares/BlackRock, Lyxor, DWS/Xtrackers, and Deka offer a complete family of low carbon ETFs with diverse regional exposure for investors to choose.

We present below a table with details of 11 selected low carbon ETFs, either with exposure to Global or EU/US stocks:

NameTickerAUM (mEUR)TER (%)MSCI ESG RatingCarbon intensity
(tCO2/$1M revenue)
BNP Paribas Easy Low Carbon 100 EuropeLCEU8370.30%AAA48.2
Amundi Index MSCI Global Climate ChangeLWCR2450.25%A79.5
Deka MSCI USA Climate Change ESG UCITS ETFD6RQ1010.25%A50
Deka MSCI World Climate Change ESG UCITS ETFD6RP790.25%A56.6
Lyxor S&P Eurozone Paris-Aligned Climate (EU PAB) (DR) UCITS ETFEPAB/ZPAB2740.20%AA48
Lyxor S&P Global Developed Paris-Aligned ClimateGPAB/EABG450.20%A79.5
Lyxor S&P 500 Paris-Aligned ClimateZPAS/PABU330.20%A35.8
Xtrackers MSCI USA ESG UCITSXESU/XZMU9500.15%AA42.9
Xtrackers MSCI World ESG UCITS ETFXZW08860.20%AA41.4
iShares MSCI USA SRI UCITS ETFSUAS/QDVR3,6680.20%AA53.7
iShares MSCI World SRI UCITS ETFSUSW1,7470.20%AAA56.7

Analysis of EU-based low carbon ETFs

Low carbon ETFs from the same provider follow indexes with the same criteria, thus let us look at each ETF/Index family in detail:

BNP Paribas Easy Low Carbon 100 Europe

LCEU is the only European ETF with low carbon in the title. LCEU tracks the Low Carbon 100 Europe Index, which represents the 100 most environmentally friendly out of the 1,000 largest European companies. It has the highest MSCI ESG rating, ‘AAA’, and carbon intensity of 48.2 tCO2/$1M revenue. Healthcare is the sector with the highest exposure and the top 5 stocks are Nestle, Novartis, AstraZeneca, SAP, and Novo Nordisk.

Amundi Index MSCI Global Climate Change

LWCR from Amundi tracks the popular MSCI World Climate Change Index, which gives greater weighting to companies that benefit from the transition to a low carbon economy. However, the MSCI World Climate Change Index is very weak. It excludes only 42 stocks (2.6%) out of the 1,603 holdings present in the MSCI World Index. This results in an MSCI ESG score of ‘A’ and carbon intensity of 79.5 tCO2/$1M revenue.

Deka MSCI Climate Change ESG family

The Deka family of ETFs offers exposure to several regions, including World, USA, Europe, Germany, and Eurozone. The Deka ETFs go one step further than Amundi, tracking the MSCI Climate Change ESG Select Index. This index has a slightly stronger sustainability mandate, excluding controversial businesses and only including companies with an MSCI ESG rating of ‘B’ or above. For example, it excludes 173 (10.8%) of the companies from MSCI World.

The Deka MSCI USA Climate Change ESG UCITS ETF has an MSCI ESG rating of ‘A’ and carbon intensity of 50 tCO2/$1M revenues.

Lyxor S&P Paris-Aligned Climate family

The Lyxor family of low carbon ETFs is also very diverse, offering ETF products with exposure to Global, Eurozone, and US stocks. The Lyxor low carbon ETFs track a group of S&P Paris-Aligned Climate Net Total Return Indexes, which are designed to measure the performance of eligible companies to be collectively compatible with a 1.5°C global warming climate scenario. The index requires a “minimum self-decarbonization rate of GHG emissions intensity in accordance with the trajectory implied by Intergovernmental Panel on Climate Change’s (IPCC) most ambitious 1.5ºC scenario, equating to at least 7% GHG intensity reduction on average per annum.”

The largest and most sustainable in the family is Lyxor S&P Eurozone Paris-Aligned Climate (EU PAB) (DR) UCITS ETF (EPAB/ZPAB), which has an MSCI ESG rating of ‘AA’ and carbon intensity of 48.0 tCO2/$1M revenues.

Complementing the European low carbon ETFs lists we have ESG ETFs with low carbon intensity from DWS/Xtrackers and BlackRock/iShares:

Xtrackers MSCI ESG family

From DWS, the Xtrackers ESG family follows the MSCI Low Carbon SRI Leaders Indexes, which select companies with the lowest carbon exposure and highest ESG performance. The Xtrackers ESG family have MSCI ESG ratings of ‘A’ and carbon intensity around 40 tCO2/$1M revenues.

iShares MSCI SRI family

Last in the list of European low carbon ETFs is the iShares SRI family. The ETFs SUAS and SUSW have combined assets under management of more than USD 5.4 billion. The iShares SRI family tracks the MSCI SRI Select Reduced Fossil Fuel Indexes and, as we have presented before, has one of the most strict ESG criteria among iShares ESG families. The index requires companies to have an MSCI ESG rating of ‘A’ or above, excludes companies involved in controversies, and target coverage of 25% of the market capitalization of its parent index.

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Which low carbon ETFs should you buy?

US residents looking for low carbon ETFs with exposure to the US market can choose either one of the Nuveen ETFs (Nuveen ESG Large-Cap Growth ETF (NULG) or Nuveen ESG Mid-Cap Growth ETF (NUMG)) or the Change Finance US Large-Cap Fossil Fuel Free ETF (CHGX).

The Vegan Climate ETF will not bring enough novelty to an investors’ ETF portfolio, and the remaining ETF options have a weak carbon footprint and sustainability scores. Unfortunately, there is no low carbon ETF that is sufficiently good for US investors looking to have global exposure.

European residents have way more options and can choose among different ETF providers and regional exposures. The best EU-domiciled low carbon ETF with exposure to Europe is the BNP Paribas  Easy Low Carbon 100 Europe (LCEU), bringing a great sustainability focus as well.

European investors looking for ETFs with Global or US exposure can choose either low carbon ETFs from the Lyxor S&P Paris-Aligned Climate family (e.g. Lyxor S&P 500 Paris-Aligned Climate (ZPAS/PABU)) or a ETF from the iShares MSCI SRI family (e.g. iShares MSCI World SRI UCITS ETF (SUSW).

Check out our ESG ETF Database, to see a full list of ETFs and their ESG ratings compared side-by-side


Not an investment advice: The information provided on this website is intended for general information purposes only and does not constitute investment advice, financial advice, trading advice, or any other sort of advice. You should conduct your due diligence and, if necessary, consult a qualified independent financial advisor before making any investment decisions.

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Fernando

Fernando created Your Green Wealth to help investors find sustainable investing options. When not writing for Your Green Wealth, he is a business developer for renewable energy projects.

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