‘While the transition to a lower carbon world will take time, our portfolios need to mitigate climate change risk,’ said Christopher Ailman, chief investment officer of Calstrs © Getty Images

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Institutional investors have put $1.25bn into a new US fund aimed at identifying the winners of the transition to a low-carbon world, making it the largest exchange traded fund launch ever and underscoring the surging demand for ESG products.

The BlackRock US Carbon Transition Readiness fund began trading on Thursday, eclipsing the previous largest ETF listing, the iShares ESG MSCI USA Leaders fund, which debuted with $850m in May 2019.

A sister fund that invests in non-US companies also launched on Thursday after attracting $475m from investors, also one of the largest new ETFs ever launched.

Rather than exclude companies that rate poorly on climate-related metrics, the new ETFs take an underlying equity index — the Russell 1000 and MSCI All World ex-US index, respectively — and assign portfolio weightings that reflect a carbon transition readiness score.

“Winners and losers will emerge in every sector and industry based on each company’s ability to adapt and pivot their strategies and business models,” said Larry Fink, chief executive of BlackRock.

“More and more capital is being allocated to sustainable strategies. These funds will enable investors to understand which companies are transitioning faster than others.”

ESG investing aims to tilt money towards companies with strong environmental, social and governance records. Total assets in the sector rose 50 per cent last year to a record $1.7tn, according to Morningstar.

Meanwhile, a growing number of governments, companies and asset managers are committed to achieving a net zero greenhouse gas emissions target by 2050. Carbon transition ETFs are being pitched as a way to encourage the trend — and to benefit from it.

“These ETFs represent a way to find managements that will change their company’s thinking on climate change,” said Christopher Ailman, chief investment officer of the California State Teachers’ Retirement System, or Calstrs.

The focus of many corporate leaders on industry comparisons will increasingly include their carbon footprint and how it affects their share price, said Ailman. “What gets measured, gets managed.”

Calstrs contributed $650m to the new US ETF and $350m to the global fund. Other investors backing the launches included Temasek, Sura Asset Management, Varma Mutual Pension Insurance Company, Profuturo Group, FM Global and RenaissanceRe.

Companies in the ETFs are graded on a “carbon transition readiness” score that reflects their reliance on energy production, clean technology, energy, waste and water management. A higher forecast rate of carbon reduction will result in a company being overweighted in the ETFs relative to industry rivals. The data is derived internally by BlackRock via Aladdin Climate and from third-party providers including MSCI, Sustainalytics and Refinitiv.

The expectation is that companies actively transitioning to the low-carbon economy will outperform over the long-term, benefiting investors, said Ailman at Calstrs.

“As a long-term investor we are looking for a big wave that we can ride and while the transition to a lower carbon world will take time, our portfolios need to mitigate climate change risk. In order to meet a net zero carbon target by 2050 or earlier, investors need to start now.”

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