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The Lyxor ETFs on this website are undertakings for collective investment in transferable securities (UCITS) (i) domiciled in France and approved by the Autorité des Marchés Financiers (AMF) or, (ii) domiciled in Luxembourg, approved by the Commission de Surveillance du Secteur Financier (CSSF) and authorised to market their units or shares in the French Republic in accordance with the notification procedure under Article 93 of Directive 2009/65/EC. Investors should note that the prospectuses of certain Lyxor ETFs under Luxembourg law that have been notified in accordance with this procedure are only available on the website in English. A French translation of these prospectuses can be obtained upon request by sending a letter to Lyxor International Asset Management (“Lyxor”) – 17 Cours Valmy, 92987 Paris La Défense, France.

 

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In particular, the Lyxor ETFs on this website are not and will not be registered under the United States Securities Act of 1933, as amended. As such, they may not be offered or sold within the United States of America, except in specific cases where transactions are exempt from registration under the Securities Act. The ETFs listed on this website may not be sold to US citizens or transferred to the United States by any other means, unless this transaction is not subject to any specific registration under US law. 

 

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The net asset value (“NAV”) of Lyxor ETFs may at any time be subject to considerable price fluctuations, which in some cases may lead to the loss of all of the capital invested. Investors should note that some ETFs may be sensitive to fluctuations in the exchange rate between their reference currency and that of the underlying index, as well as of the components of the underlying index.

 

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08 Oct 2020

Climate investing: if not now, when? If not you, who?

For all the environmental, social and governance (ESG) challenges companies face today, there is one which unites them all – a challenge dwarfing all others in its urgency.

‘E’ for the environment. ‘E’ for the elephant in the room. ‘E’ for the emergency we all now face – the failure of our fossil-fuel civilisation to address climate change.

The urgent threat of global warming demands a revolution in our energy systems. We are already late – but not too late. As asset managers and investors, we still have the power to change the world by helping to shift trillions of dollars towards climate-friendly investments. History may judge us harshly if we don’t.

Thankfully, help is at hand in the form of climate-aligned benchmarks, and the innovative new ETFs which use them.

Accepting the challenge

By providing for the limiting of global warming to “well below 2°C above pre-industrial levels” and to “pursue efforts to limit the increase in temperatures to 1.5°C”, the 2015 Paris Agreement committed 195 countries to radical and meaningful change in their emissions and climate policies.

Achieving this will be challenging, but we can all be difference makers. When it comes to CO2 emissions, the devil is in the detail. How can you tell if your portfolio is on the right track?

Setting new standards

Thanks to the work done by organisations such as the CDP (formerly the Carbon Disclosure Project), the Taskforce for Climate-Related Financial Disclosure (TCFD) and the Science-Based Targets (SBT) initiative, there is now a transparent framework for calculating, forecasting and disclosing data on companies' carbon emissions.

SBTs make the link between individual companies’ projected CO2 emissions and a projected average increase in temperature. Linking an investment portfolio to a specific temperature figure is an extremely simple measure for investors big and small to grasp.

Sadly, the figures don’t make for pleasant reading as they stand. Most major equity benchmarks currently imply temperature rises of around 4°C or more, which could be disastrous.1

Benchmark Regulation: the missing link

The EU is in the process of updating its benchmark regulations, forcing index creators to disclose whether major existing benchmarks are aligned with the Paris Agreement’s warming scenario.

It’s also endorsing the creation of Climate Transition Benchmarks (CTB) and Paris-Aligned Benchmarks (PAB). These benchmarks will make it much simpler to create investment instruments which comply with the Agreement and start financing the transition to a world in which the average rise in temperature is limited to 1.5°C above preindustrial levels.

We believe these CTB and PAB labels will soon become as commonplace as organic labels for food products, and they’ll serve a similar purpose – an at-a-glance way of ensuring something is being done properly or is “clean”. The indirect effect will be to stigmatise “dirty” indices – practically all the major benchmarks still used by institutional investors.

The EU’s new benchmark regulations could bring about a genuine revolution – and lead to a world in which equity flows and company valuations are dependent on companies’ carbon footprints.

A virtuous circle

Publishing the temperature scenarios of the major benchmarks will affect almost everybody. Institutions and big-name brands, fund and wealth managers, private banks and advisory networks, could all become associated with a certain temperature scenario and a de facto position on climate change by clients, prospects and even the media. We could see a race to the bottom of the thermometer.

Amid such scrutiny, we’d expect institutions to start migrating their investments towards CTBs or PABs. Meanwhile, if the valuation of a company is being dictated by its carbon footprint, we’d expect its shareholders to pressure its management team to hasten their energy transition.

Thus, a virtuous circle is born, fuelled by forward-looking regulation and the court of public opinion.

ESG flows chart

For illustrative purposes only.

The trade of the decade

Today’s equity markets are pricing in an unrealistically and unsustainably low cost for energy and electricity because they are not taking the “real cost” of CO2 emissions into account. Nor are they factoring in the trillions of dollars needed to transform the world’s energy mix.

Some estimates currently suggest we must keep 80% of known fossil-fuel reserves underground or risk heating our planet far past the red lines drawn by scientists and governments.2

The equity markets however are still pricing some of those reserves in to oil producers’ stock prices. This could be the biggest hidden risk in your portfolios today, and it’s a risk you can’t hedge.

“Decarbonising” portfolios is not possible without reducing exposure to a potential fossil-fuel rebound. For us, that’s a portfolio risk worth taking. Accepting the challenge offers real potential for forward-thinkers with an eye on the bigger picture. We believe it will be the trade of the next decade, and beyond.

Of course, adjusting portfolios to such a degree is challenging. It will take years for such expertise to be widely shared – years we don’t have. Step forward the world’s indexing giants and their new indices.

Indices, and ETFs, are the highway to transition

We believe a quantitative, rules-based approach is the best way to employ the enormous (and ever growing) quantity of climate data now available. The world’s leading index companies, S&P and MSCI, have been building their climate expertise through corporate acquisitions, and are now sharing it in climate indices eligible for the EU’s CTB and PAB labels.

Of course, just building these indices isn’t enough to win the war. Investors must actually use them. Shifting money en masse to these indices is what will help us turn the tide.

‘Investment influencers’ and early adopters can play a key role here. It would only take a few sizeable, active and engaged asset owners to seed certain indices and ETFs, and thereby prompt many others without the time and resource to build their own climate-friendly portfolios to follow.

ESG flows chart

For illustrative purposes only.

Once in a lifetime

We are on the cusp of a paradigm shift for listed markets of a scale comparable to the rise of the digital age. The sweeping changes to benchmark regulations could be the catalyst for a cleaner, greener future.

This is a once-in-a-lifetime opportunity for ETF providers to be champions of change and put the power in people’s hands at the click of a button.

Everyone can play a part in this revolution, from the world’s biggest asset owners to the individual investor planning for retirement in the comfort of his or her armchair. Just think: one person clicking that button and moving their savings into climate-action funds is far more impactful than that same person quitting flying or using public transport or becoming a vegan.3 What happens if millions of us do it?

Never think it’s too late. Never believe your contribution is too small. Never say never. We all have the power to change the world.

Explore our range of Climate Transition ETFs, designed to align with the Paris Agreement’s most ambitious goal – to limit global warming to 1.5°C

1Source: EU Technical Expert Group (TEG) on Sustainable Finance Interim Report on Climate Benchmarks, June 2019.
2Source: Bill McKibben, author and and leader of environmental group 350.org, https://350.org/why-we-need-to-keep-80-percent-of-fossil-fuels-in-the-ground/
3Source: https://www.nordea.com/en/sustainability/sustainability-news/nordeas-illustrative-analysis-on-carbon-footprint-from-savings.html

Risk Warning
This document is for the exclusive use of investors acting on their own account and categorised either as “Eligible Counterparties” or “Professional Clients” within the meaning of Markets in Financial Instruments Directive 2014/65/EU. These products comply with the UCITS Directive (2009/65/EC). Société Générale and Lyxor International Asset Management (LIAM) recommend that investors read carefully the “investment risks” section of the product’s documentation (prospectus and KIID). The prospectus and KIID are available free of charge on www.lyxoretf.com, and upon request to client-services-etf@lyxor.com.

Except for the United-Kingdom, where this communication is issued in the UK by Lyxor Asset Management UK LLP, which is authorized and regulated by the Financial Conduct Authority in the UK under Registration Number 435658, this communication is issued by Lyxor International Asset Management (LIAM), a French management company authorized by the Autorité des marchés financiers and placed under the regulations of the UCITS (2014/91/EU) and AIFM (2011/61/EU) Directives. Société Générale is a French credit institution (bank) authorised by the Autorité de contrôle prudentiel et de résolution (the French Prudential Control Authority).

The products mentioned are the object of market-making contracts, the purpose of which is to ensure the liquidity of the products on the London Stock Exchange, assuming normal market conditions and normally functioning computer systems. Units of a specific UCITS ETF managed by an asset manager and purchased on the secondary market cannot usually be sold directly back to the asset manager itself. Investors must buy and sell units on a secondary market with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current net asset value when buying units and may receive less than the current net asset value when selling them. Updated composition of the product’s investment portfolio is available on www.lyxoretf.com. In addition, the indicative net asset value is published on the Reuters and Bloomberg pages of the product, and might also be mentioned on the websites of the stock exchanges where the product is listed.

Prior to investing in the product, investors should seek independent financial, tax, accounting and legal advice. It is each investor’s responsibility to ascertain that it is authorised to subscribe, or invest into this product. This document is of a commercial nature and not of a regulatory nature. This material is of a commercial nature and not a regulatory nature. This document does not constitute an offer, or an invitation to make an offer, from Société Générale, Lyxor Asset Management (together with its affiliates, Lyxor AM) or any of their respective subsidiaries to purchase or sell the product referred to herein.

Research disclaimer
Lyxor International Asset Management (“LIAM”) or its employees may have or maintain business relationships with companies covered in its research reports. As a result, investors should be aware that LIAM and its employees may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see appendix at the end of this report for the analyst(s) certification(s), important disclosures and disclaimers. Alternatively, visit our global research disclosure website www.lyxoretf.com/compliance.

Conflicts of interest
This research contains the views, opinions and recommendations of Lyxor International Asset Management (“LIAM”) Cross Asset and ETF research analysts and/or strategists. To the extent that this research contains trade ideas based on macro views of economic market conditions or relative value, it may differ from the fundamental Cross Asset and ETF Research opinions and recommendations contained in Cross Asset and ETF Research sector or company research reports and from the views and opinions of other departments of LIAM and its affiliates. Lyxor Cross Asset and ETF research analysts and/or strategists routinely consult with LIAM sales and portfolio management personnel regarding market information including, but not limited to, pricing, spread levels and trading activity of ETFs tracking equity, fixed income and commodity indices. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and reports. Lyxor has mandatory research policies and procedures that are reasonably designed to (i) ensure that purported facts in research reports are based on reliable information and (ii) to prevent improper selective or tiered dissemination of research reports. In addition, research analysts receive compensation based, in part, on the quality and accuracy of their analysis, client feedback, competitive factors and LIAM’s total revenues including revenues from management fees and investment advisory fees and distribution fees.

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