First Trust Advisors (First Trust) has launched the First Trust EIP Carbon Impact ETF (ECLN), which is managed and sub-advised by Energy Income Partners (EIP).
ECLN seeks to achieve a competitive risk-adjusted total return, balanced between dividends and capital appreciation, by investing in the equity securities of companies that currently have, or are seeking to have, a positive carbon impact.
According to EIP, technological improvements have dramatically lowered the cost of alternative energies, allowing adoption to become more economical and provide a source of earnings growth for utilities. “Electric utilities and gas pipelines sit at the centre of the transition to a cleaner, more sustainable energy system. Since peaking in 2007, US carbon dioxide emissions have declined by 12 per cent, through 2018, and the electric power sector – comprising a mere 2 per cent-3 per cent of S&P 500 market capitalisation – has driven 90 per cent of that reduction by replacing coal-fired generation with solar, wind and cleaner-burning natural gas,” says James Murchie, President, Founder and CEO of EIP and Co-Portfolio Manager for the fund.
The companies chosen for inclusion in the fund are companies that reduce, have a publicly available plan to reduce, or enable the reduction of carbon and other greenhouse gas emissions from the production, transportation, conversion, storage and use of energy.
“While details are difficult to predict, we believe the trend to cleaner energy will likely remain centred around energy infrastructure companies adopting and integrating new technologies,” Murchie says.
EIP’s general investment approach is to invest with the regulated monopoly shippers of energy who may benefit when the cost of the energy they are shipping declines, unlike the upstream energy producers whose fortunes are tied to commodity prices. EIP believes this approach remains sound in a transition to lower-carbon energy; the “upstream” makers of wind turbines and solar panels operate in a competitive market that may pressure prices and margins, but the buyers of those products – including utilities and their customers – may benefit as costs decline. Portfolio construction for the fund involves a four step process that screens companies for a positive carbon impact and eliminates companies involved in coal production, crude oil exploration and production, or crude oil transportation, storage or delivery.
“This unique strategy provides exposure to companies that may have the greatest impact on reducing carbon emissions, while also pursuing attractive risk-adjusted returns, with a relatively stable stream of income,” says Ryan Issakainen, CFA, Senior Vice President, ETF Strategist at First Trust.
In addition to James Murchie, the fund’s portfolio management team from EIP includes Eva Pao, Co-Portfolio Manager and Principal of EIP, and John Tysseland, Co-Portfolio Manager and Principal of EIP.