What Are Low-Carbon Funds and Should You Invest?

Low-carbon funds like the iShares MSCI ACWI Low-Carbon Target ETF (CRBN) invest in companies with a lower carbon footprint relative to their peers. Many investors think that these funds do not invest in fossil fuel companies, but that isn’t true. You should consider low-carbon funds if you want your portfolio to be “greener” without deviating too much from the stock market. But they are not a good choice for the fossil fuel free investor.

SustainFi July 21, 2021

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What Are Low-Carbon Funds and Should You Invest?

Some investors, especially institutions like pension funds, want their investments to be more environmentally friendly. But they are also careful not to step away too much from the broader stock market. Enter low-carbon funds.

Low-carbon funds seek to own companies with a lower carbon footprint or greenhouse gas emissions relative to the market.

Rating providers like MSCI measure the carbon intensity of the companies in a fund in tons of carbon per dollar of revenue. Then they assign carbon intensity metrics to the fund. These metrics help compare low-carbon funds to the benchmark, such as the S&P 500 Index.

Why do low-carbon funds invest in fossil fuel stocks?

Low-carbon funds try to track the stock market as a whole, and the stock market includes energy companies.

As a result, most low-carbon funds do not divest from oil and gas stocks like fossil free funds. Nor do they target social or governance metrics like popular environmental, social, and governance (ESG) funds.

Most low-carbon funds will invest in every industry, including fossil fuels, but they try to avoid the worst-polluting offenders. In contrast, they assign more weight to companies with the lowest greenhouse gas emissions in each sector.

Should you invest in low-carbon funds?

If you don’t want to own any fossil fuel companies because they are destroying the environment, low-carbon funds are not for you. You should consider fossil free funds.

But, if you want to be as diversified as possible and own the broader stock market while being “greener,” keep reading. A low-carbon fund could be your main stock holding if you are concerned about the climate but want to achieve market-like returns and don’t want to divest from fossil fuels.

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Top five low-carbon funds

The top exchange-traded funds (ETFs) that marketed as low-carbon are:

  • iShares MSCI ACWI Low-Carbon Target ETF (CRBN)
  • Etho Climate Leadership US ETF (ETHO)
  • SPDR MSCI ACWI Low-Carbon Target ETF (LOWC)

There is also the TIAA-CREF Social Choice Low-Carbon Equity Fund (TLWCX), a low-carbon mutual fund.

Finally, there are climate transition funds like LCTU. These funds try to own companies that will do slightly better than the market, considering the consequences of climate change.

For example, in April 2021, giant asset manager BlackRock launched the $1.25 billion BlackRock U.S. Carbon Transition Readiness ETF (LCTU). The fund aims to perform close to the broad market while owning more shares in companies best positioned for the clean energy transition and fewer polluting companies. (Like most low-carbon funds, LCTU owns oil and gas stocks.)

Top five low-carbon funds

FundTickerTypeExpense RatioAssets ($m)Carbon Intensity% Fund in Fossil Fuels
BlackRock U.S. Carbon Transition Readiness ETFLCTUETF0.15%1,40072.96.2%
iShares MSCI ACWI Low Carbon Target ETF
CRBNETF0.20%83667.55.0%
TIAA-CREF Social Choice Low Carbon Equity FundTLWCX
Mutual Fund0.63%80458.93.4%
Etho Climate Leadership US ETF

ETHOETF0.45%16551.90%
SPDR MSCI ACWI Low Carbon Target ETFLOWCETF0.20%11467.55.0%
Vanguard S&P 500 ETFVOOETF0.03%239,000139.66.7%

As of 7/21/2021. Sources: MSCI, Fossil Free Funds. Carbon intensity is measured in tons of CO2/$m in sales. Vanguard S&P 500 ETF is shown for comparison.

💰 Our Pick

We like the iShares MSCI ACWI Low-Carbon Target ETF (CRBN), which offers the best combination of price and carbon footprint. The fund is relatively cheap (0.20% annually or $20 on a $10,000 investment), and its carbon intensity is almost 50% lower than that of the S&P 500 Index.


Learn more about each of the five low-carbon and carbon transition funds:

BlackRock U.S. Carbon Transition Readiness ETF (LCTU)

  • Type: ETF
  • Expense ratio: 0.15%
  • Carbon emissions: 72.9 tons / $m in revenue

The BlackRock U.S. Carbon Transition Readiness ETF (LCTU) is a new climate transition fund that invests in companies that should do better than the market during the transition to a low-carbon economy. LCTU is diversified across sectors and will give you exposure to energy (if that’s what you want) while investing more in energy companies with lower emissions.

The fund’s goals are to:

  • Manage risk while overweighting companies better positioned for the climate transition
  • Invest in the broad market
  • Use many sources of climate data

LCTU is an active ETF, meaning that the fund managers select stocks to fit their investment thesis. BlackRock selects companies with higher climate transition readiness scores across five pillars, such as involvement in fossil fuels, exposure to clean technologies, and energy, water and waste management. LCTU doesn’t invest in weapons, tobacco, thermal coal, or oil sands.

LCTU invests in large and mid-cap U.S. firms picked from the Russell 1000 Index, with a preference for companies with a lower carbon footprint. As you can see, the fund’s carbon emissions are only about 50% of the S&P 500 (and Russell 1000), though it allocates roughly the same percentage of its money to energy stocks.

Like many large-cap funds, LCTU favors big tech, and its top investments are Apple (AAPL), Microsoft (MSFT), and Amazon (AMZN).

Make an impact with your money

Build custom ESG portfolios for free

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$0

$125 for M1 Plus

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$100

Open a green bank account

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Save your change and invest in ESG portfolios

Fees

$3-$5

/month

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

  • Type: ETF
  • Expense ratio: 0.20%
  • Carbon emissions: 67.5 tons / $m in revenue

Launched in 2014 by BlackRock, the iShares MSCI ACWI Low-Carbon Target ETF (CRBN) invests in global stocks with lower greenhouse gas emissions relative to their peers. The fund tracks the MSCI ACWI Low-Carbon Target Index and tries to achieve market-like returns while reducing carbon emissions.

CRBN is very diversified: it owns over 1,300 stocks. The fund invests in the U.S. (59% of assets), developed markets, and emerging markets. The U.S. aside, the fund’s top regions are Japan (6% of assets), Hong Kong (5%), and the United Kingdom (3%). At the time of this writing, its top three stocks were Apple (AAPL), Microsoft (MSFT), and Amazon (AMZN).

CRBN invests slightly less in energy stocks than the S&P 500 (roughly 5% of assets vs. nearly 7%), but its carbon intensity is around 50% lower.

Note: CRBN is not a clean energy or a fossil free fund. Nor does it rate stocks based on social or governance factors or exclude sectors such as tobacco.

The SPDR MSCI ACWI Low-Carbon Target ETF (LOWC) tracks the same index as CRBN and has the same 0.20% expense ratio. The difference is that it was launched by a different manager, State Street.

TIAA-CREF Social Choice Low-Carbon Equity Fund (TLWCX)

  • Type: mutual fund
  • Expense ratio (Retail Shares): 0.63%
  • Carbon emissions: 58.9 tons / $m in revenue

TIAA-CREF Social Choice Low-Carbon Equity Fund (TLWCX) is an actively managed mutual fund that seeks similar returns to the U.S. stock market. (Its benchmark is the Russell 3000 Index.)

At the same time, the fund’s managers consider environmental, social, and governance (ESG) criteria, carbon emissions, and exposure to oil, gas, and coal reserves.

At the time of this writing, the fund owned over 480 stocks, and the top three were Microsoft (MSFT), Tesla (TSLA), and NVIDIA Corp (NVDA). Energy investments were limited as a percentage of assets (only around 3%), and the fund had only about 40% of the carbon intensity of the S&P 500.

TLWCX was launched in 2015, returning 15.4% annually and outperforming its benchmark. However, the 0.63% fee is high relative to the ETFs on this list.

Etho Climate Leadership U.S. ETF (ETHO)

  • Type: ETF
  • Expense ratio: 0.45%
  • Carbon emissions: 51.9 tons / $m in revenue

Etho Climate Leadership U.S. ETF (ETHO) is a U.S. stock fund that is both low-carbon and fossil free. It tracks the Etho Climate Leadership Index, which selects the most carbon-efficient companies within their sectors. ETHO is the only ETF from Etho Capital, a certified B Corp which pledges to balance profit and purpose.

ETHO excludes all fossil fuel stocks (as well as tobacco, defense, gambling, gold, and silver mining businesses). The fund’s carbon intensity, measured in tons of CO2 emissions per dollar of sales, is less than 40% of that of the S&P 500 Index.

The fund owns 266 stocks, mostly tech, industrials, and financials.

Considering the 0.45% expense ratio, ETHO is not the cheapest ETF, though it’s a very solid ESG and fossil free option for U.S. stocks.


💰 Takeaway

Low-carbon funds are a good choice if you want to reduce the carbon emissions of your portfolio while maintaining market-like returns.

They are not a good choice if you don’t want to own fossil fuels (in that case, look for fossil free funds) or want to invest in clean energy (we suggest clean energy funds like ICLN).


🔔 If you want to invest in the climate transition, you can also explore carbon credit funds.