The Anatomy of an ESG Fund: How Was the Purpose Global Climate Opportunities Fund Created?

The objective of the Purpose Global Climate Opportunities Fund (CLMT) is to generate gains from identifying leaders in addressing climate risk. Our team achieves this objective by leveraging a fundamental, top-down approach to selecting global equities from a broad universe.

ESG investing, the anatomy of an ESG Fund

The objective of the Purpose Global Climate Opportunities Fund (CLMT) is to generate gains from identifying leaders in addressing climate risk. Our team achieves this objective by leveraging a fundamental, top-down approach to selecting global equities from a broad universe.

The ESG Investment Process: Exposure to Five Thematic Buckets

We bucket securities according to five themes that holistically capture all the companies and industries positioned to benefit from the policy and economics of the fight against climate change. The five themes include clean energy, energy transition, transport and infrastructure, energy efficiency, and circular economy. Across all five core themes we focus on low-impact businesses, transformational technologies, and high abatement potential to select winning stocks.

Areas of opportunity

Supplementing the Top-Down Selection Processes with a Lifecycle Approach

In addition to selecting securities that provide exposure to each thematic bucket, we also use a lifecycle approach to ensure that each theme has diversification across the technology lifecycle to make sure we invest in both mature and prototype companies and all that’s in between. The lifecycle approach includes three phases: (1) energy transition, which includes high emissions-intensive industries with high abatement potential and growth opportunities in energy transition solutions; (2) new demand creation, where we look for companies that are inventing products that satisfy the demand for energy while not creating any net new emissions; and (3) net removal of carbon and emissions from the system.

Example of Low-carbon Lifecycle Approach

Geographic Allocation

From a geographic standpoint, we created a global mandate because there are progressive green strategies developing all over the world. For example, opportunities in the refining space under the energy transition theme will likely be in the U.S. where they have the most complex refining capabilities and stringent biofuel blending regulations. In the clean energy space, offshore wind is most successful in Europe where they are in close proximity to the jet stream.

Within a global mandate, there are vast opportunities to reduce emissions in almost every single industry. Ultimately security selection comes down to our team doing the hard work in quantemental screening, recognizing the technologies available to reduce emissions in different industries, understanding individual businesses through talking with management team, and staying on top of capital flow and new deals in the space.

A Word About Climate Risk

For climate-related risks, one of our focus areas is transition risk, which is associated with the transition to a low-carbon economy. A company’s carbon footprint is important, but that in and of itself is not an adequate measure of risk. It needs to be viewed in conjunction with demand elasticity and pricing power (both near- and long-term) resulting from materially higher carbon costs. Furthermore, the tightening of climate-related regulations is the largest and perhaps the most financially tangible risk for investors. This is certainly the case for the U.S. where regulations have so far been lagging behind other developed countries.

While these risks are prevalent, we have designed CLMT in a way so that advantages far outweigh any downside. For example, by selecting stocks that have high abatement potential (which is the availability of cost-competitive and scalable low-carbon alternatives) we ensure that we are picking companies that can adapt to new regulations. We also mitigate risk by choosing companies that have strong potential to create new demand, whether through changing product offerings or supply chains. Finally, we pick companies that have strong management teams that can set and drive the execution of emissions reduction targets. In particular, we look for companies that tie executive compensation with the performance of the climate goals.

Managing risk in this way is supported by industry leaders as exemplified by the Opportunity/Risk Matrix created by Credit Suisse. CLMT leverages this framework to further narrow down the equity universe in a way that illuminates potential opportunities for investments that outweigh the aforementioned risks in a time-tested and proven way.

Opportunity/Risk Matrix

For more information about the Purpose Global Climate Opportunities Fund and sustainable investing, please check out these articles: The Biden Effect: How the New Administration Is Creating Waves of Climate Change, Capitalizing on Carbon Neutrality: The Past, Progress, and Potential, ESG Diaries: Defining the Value (and Limits) of ESG Integration, and ESG Diaries: Five Things We’ve Learned About Our Approach.

— Jeremy Lin is a Portfolio Manager at Purpose Investments


All data sourced from Bloomberg unless otherwise noted.

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