• Fund watch
  • carbon transition
  • clean energy

Will the Lyxor MSCI Europe ESG Climate Transition ETF lead the ESG fund race?

There has been a surge in ESG funds in recent years, as investors increasingly embrace the carbon transition. Nestlé and ASML, top holdings in the Lyxor MSCI Europe ESG Climate Transition CTB ETF, exemplify some of the ways that companies are shifting operations while maintaining strong sales growth.

- A surge in ESG funds is underway, as investors look to invest in the green revolution.

- Fund top holdings maintain strong performance despite regulatory and inflationary pressures

- Greenwashing concerns are on the rise in Europe.

The Lyxor MSCI Europe ESG Climate Transition CTB ETF [CLEU.L] invests in companies that are held within the MSCI Europe ESG Climate Transition Benchmark: large- and mid-cap European securities which are addressing future climate risks and leading the transition towards a lower-carbon economy.

The fund is up 13.4% year-to-date, performing better than the 5.1% gains made by the FTSE 100.

In recent years, there has been a surge in the number of ETFs which invest in line with environmental, social and governance (ESG) considerations. The number of ESG-focused funds has more than doubled in the last two years: the total was nearly 1,300 at the end of 2022, according to consultancy firm ETFGI.

Rather than investing in companies that operate in traditional ESG sectors such as clean energy generation, the Lyxor MSCI Europe ESG Climate Transition ETF focuses on companies from diverse industries, but which all have an environmental focus in common.

As of 26 April, the industrials sector makes up 20.81% of the fund’s total holdings, financials 13.54%, consumer staples 13.11%, and health care 11.24%, while the remaining holdings are split between information technology, utilities, materials and communication services.


Top holdings perform well despite challenges

The fund’s top holding, Nestlé [NESN.SW], makes up 3.97% of the fund’s portfolio.

In 2020, the company announced its goal to reach zero emissions by 2050. It plans to invest CHF3.2bn through 2025 to aid that effort. Nestlé is also piloting the use of new satellites to monitor reforestation efforts carried out in Thailand, with the company aiming to plant 200 million trees throughout its supply chain by 2030.

Nestlé released first quarter results last week, revealing that in the first three months of the year it raised its prices faster than it had done in three decades, with an average jump of nearly 10%. Nevertheless, sales were up 5.6% year-over-year, beating forecasts.

Nestlé’s share price is up 8.9% since the beginning of the year and down 7.3% over the past 12 months.

Dutch semiconductor company ASML Holding [ASML.AS] is the fund’s second-largest holding, making up 3.41% of total assets. The company is helping develop new semiconductors needed for the clean energy shift.

In March, it was announced that a ban from the Dutch government would prevent the company from exporting new chips to China amid security concerns. Chinese demand makes up 15% of ASML’s backlog as of January.

ASML’s share price is up 12.2% year-to-date and up 4.3% in the past 12 months.


Greenwashing concerns

With investors increasingly turning towards companies and funds that puport to have a positive impact on society and the environment, there are some concerns that ETFs are overstating their positive impacts. As a result, European regulators will likely tighten rules for ETFs trading under the ESG banner. This could impact the Lyxor MSCI European ESG Climate Transition CTB ETF.

Despite this, analysts are optimistic about the fund’s top two holdings. Out of 25 analysts polled by Refinitiv regarding Nestlé shares, four gave ‘buy’ ratings, 11 ‘outperform’, eight ‘hold’ and the remaining two ‘underperform’.

Analysts shared even better forecasts for ASML stock. Out of the 33 analysts polled by Refinitiv, seven gave ‘buy’ ratings, 18 ‘outperform’, seven ‘hold’, and one ‘underperform’.

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