1. Case Study: Climate Change Takes Center
Stage at U.N. Pension Fund
For more than two decades, the United Nations has been a leader in efforts to reduce global carbon
emissions. In 2014, the stewards of the $54 billion U.N. Joint Staff Pension Fund (UNJSPF)
wondered if they could find a way to help in that effort.
An Environmentally Conscientious Institution Moves Beyond Divestment: The following case
study chronicles how the UNJSPF backed the launch of two Exchange Traded Funds that allow
investors to substantially reduce their exposure to carbon emitters without sacrificing the returns of
a diversified, global equity portfolio.
“The U.N. wanted a bigger megaphone,” says one ETF industry member who worked on the
project. “Their view is that two major providers would deliver more visibility than one.”
Background
About 18 months ago, when the UNJSPF began to explore ways it might reduce emissions, one
obvious possibility came up: outright divestment of carbon-heavy assets in industries such as oil,
gas and coal. A range of institutions — including public pension funds, university endowments and
government entities, with more than $1 trillion under management — have committed to divest
carbon-related investments, according to an estimate by 350.org, an international environmental
organization encouraging divestment.
But Yukio Takasu had other ideas. Takasu is the U.N.’s Under-Secretary-General for Management,
with responsibility for overseeing the investment of the UNJSPF in the summer of 2014. Amidst a
massive U.N.-led initiative to reduce emissions, Takasu knew the fund needed to lead, but he also
believed that divestment might breach the fund’s fiduciary responsibility by putting returns at risk.
So in the summer of 2014, just before the U.N.’s annual climate summit, he directed his staff to
come up with a more moderate approach.
“The Secretary General was eager for us to propose actionable ideas to reduce the carbon
footprint,” Takasu recalls. “He wanted to know what our pension fund could do to lead by example.”
The solution came in December, when the U.N. announced it would seed two ETF portfolios with
strategies based on underweighting companies with a heavy carbon footprint, rather than excluding
them altogether from the portfolio.
The goal of those exchange-traded funds — the State Street Global Advisors’ SPDR MSCI ACWI
Low Carbon Target ETF (LOWC), and BlackRock’s iShares MSCI ACWI Low Carbon Target ETF
(CRBN) — is to track the MSCI ACWI Low Carbon Target Index, which aims to produce returns
within 30 basis points of the broader MSCI ACWI index, despite reduced exposure to carbon heavy

2. companies. (The MSCI ACWI index includes large and mid-cap stocks across 23 Developed
Markets and 23 Emerging Markets countries.)
Support for these ETFs is a recent development in the United Nations’ longstanding efforts to
improve the environment. In 1992, the U.N. released its Framework Convention on Climate
Change, which established long-term goals to stabilize greenhouse gas concentrations in the
atmosphere. To date, 195 parties, including the U.S., have ratified the UNFCCC. This framework
has since been amended several times, with the latest global climate change agreement expected
to be adopted in December 2015 in Paris.
Socially conscious investors have pursued two paths in responding to climate concerns: investing in
alternatives and divestment.
Some investors have chosen to back alternative energy providers, such as solar, biofuel and
hydropower companies. Many of these companies, however, are small or privately held. A report by
the United Nations Environment Programme — the arm of the U.N. that coordinates its
environmental activities — found that of the $270 billion invested in renewable energy in 2014, only
$15 billion was directed to public equities.
A growing number of managers of large, publicly traded portfolios have opted to divest from
companies that are heavy carbon emitters. Some are yielding to pressure from environmental
activists who, taking a cue from the anti-apartheid and anti-tobacco movements of decades past,
are putting pressure on pension funds and university endowments. They argue that it is the moral
obligation of major institutions to sell their holdings in coal, oil and gas companies.
The list of those divesting such investments ranges from the government of Norway to Stanford
University to Axa, the French insurer, which pledged to sell $560 million in coal investments.
Divestment, however, inevitably has its limits. Even those who favor it acknowledge that a majority
of institutional and individual investors will not be willing to sell all of their energy-related holdings.
Fund managers will be unwilling to take the fiduciary risk of ignoring such a large share of the public
markets and potentially putting their portfolio returns at risk.
“Divested holdings are likely to find their way quickly to neutral investors. Some investors may even
welcome the opportunity to increase their holding of fossil fuel companies, particularly if the stocks
entail a short-term discount,” according to a 2013 report by Oxford’s Smith School of Enterprise and
the Environment.
Desired Outcome
In advance of the UN Secretary-General’s Climate Summit in New York in September 2014, the
U.N. sought to make a statement about its own, $54 billion pension fund’s approach to the
environment. “The Secretary General was eager for us to propose actionable ideas to reduce the
carbon footprint,” recalls Takasu. “He wanted to know what our pension fund could do to lead by
example.”
At the urging of U.N. Secretary General Ban-Ki-moon, Takasu briefly considered divesting the
pension fund’s entire energy portfolio. But given that such investments accounted for more than
11% of fund assets, he quickly realized that divestment could dent the fund’s long-term
performance. So Takasu tasked his team to look for an alternative, one that could be announced
around the time of the September meeting.

3. The solution that the U.N.’s pension fund ultimately supported—with a public endorsement as well
as a significant investment -- involved underweighting carbon-heavy companies, rather than
removing them completely from the portfolio. “We wanted to take a more holistic approach,” Takasu
said.
Chosen Solution and Alternatives
The methodology for the U.N.’s chosen strategy was developed by MSCI.
Ajit Singh, chief risk manager for the U.N. pension fund, had already been involved in market
consultations with the MSCI working group for what would become the MSCI Global Low Carbon
Target Index. Singh supported MSCI’s efforts to develop an index that would address the
reweighting option, as well as an option that supported the divestment route.
The new MSCI low carbon indices were specifically launched to coincide with the meetings, “which
catalyzed interest in carbon asset risk on the part of investors,” said Thomas Kuh, Head of ESG
Indexes for MSCI. “The carbon indexes were developed with institutions like the U.N. in mind.”
On September 16, MSCI introduced its Global Low Carbon Leaders Index, developed with the
support of Swedish and French pension funds, as well as Amundi, a Paris-based asset manager.
These indexes exclude companies with the highest intensity of carbon emissions and the largest
owners of carbon reserves per dollar of market capitalization.
A week later, MSCI unveiled its Global Low Carbon Target Index, which looks to re-weight stocks
based on their carbon exposure. The index is designed to achieve maximum carbon exposure
reduction given a 30 basis point tracking error relative to the ACWI parent index.
Both carbon indexes are focused on reducing—to varying degrees—exposure to oil, gas, and coal
companies. They also underweight holdings of companies from non-energy sectors that own fixed
assets such as power plants or manufacturing facilities that rely on coal or other energy sources. In
this way, the indexes address both actual emissions and potential emissions from fossil fuels, as
expressed by fossil fuel reserves.
While the broad goal of both indexes is the same, the net result of their approaches is very
different.
“Divesting reduces the carbon footprint by at least 50%, compared to the benchmark. But by taking
an underweighting approach, we are able to reduce the footprint by a far greater amount—
approximately 80%,” says Takasu.
In the weeks leading up to the MSCI index announcements, Ajit Singh took the unusual step of
approaching the leading ETF providers—BlackRock and State Street—and encouraging them to
both launch funds that would track the Low Carbon Target Index. As a sweetener, he said the
U.N.’s pension fund would invest a considerable sum in each fund and it would agree to make its
participation public.
Both investment firms were initially resistant, but Ajit would not take no for an answer.
“I told them that we are the United Nations, and the message of global climate change requires out
of the box thinking,” he said. Ultimately, both ETF sponsors relented.
“It is unusual, but it happened in this case because the U.N. strongly pushed for it,” explained
Christopher McKnett, managing director and head of ESG at State Street Global Advisors. “The

4. U.N. really wanted to spark the market—they thought they could attract more attention with two
products rather than one. Of course we’re competitors, but we viewed this in the spirit of co-
opetition.”
Scott Williamson, Managing Director - iShares, Institutional Sales, at BlackRock, agrees.
“The U.N. wanted a bigger megaphone,” he said. “Their view is that two major providers would
deliver more visibility than one.”
The two funds were announced on December 11, with a total of $150 million ($75 million apiece) in
backing from the U.N.’s pension fund. The launch coincided with the 2014 United Nations Climate
Change Conference in Lima, Peru, which included the 20th yearly session of the Conference of the
Parties to the 1992 United Nations Framework Convention on Climate Change and the 10th
session of the Meeting of the Parties to the 1997 Kyoto Protocol.
Implementation Analysis
The new low-carbon ETFs seeded by the United Nations fit within a broader investment trend
known as “ESG Investing,” or investing according to environmental, social and governance criteria.
A recent report by the Forum for Sustainable and Responsible Investment estimates that U.S.
assets managed according to ESG guidelines increased from $3.74 trillion in 2012 to $6.57 trillion
two years later.
However, ESG remains a relatively small niche within the world of ETF investing, with perhaps 30
ETFs having some $3 billion under management that follow ESG mandates, estimates Chris
Romano, an analyst with ETF Global.
“Clean energy is not a big focus among ETFs,” agrees Paul Britt, senior analyst with FactSet, who
focuses on ETFs. There are nine renewable energy ETFs. Some of these include Chinese stocks,
which can make performance more volatile.
To be sure, the U.N. endorsed low carbon ETFs are far more diversified in their investment strategy
to date than many of the other ESG exchange-traded funds. LOWC owns some 1,300 stocks and
CRBN has around 900 in its portfolio. In contrast, the The iShares MSCI KLD 400 Social ETF has
approximately 400 holdings, and the The iShares MSCI USA ESG Select Social Index Fund owns
around 100 securities.
Beyond the breadth of their holdings, the ETFs manage to lower the carbon footprint of their overall
portfolios, even as they stay within 2% of the sector allocation of the “parent” MSCI ACWI. (There is
more latitude for energy shares.)
“These are ‘have your cake and eat it too’ investments,” said Britt. “They have a socially
responsible goal but they stick very tightly to the benchmark.”
BlackRock’s Williamson agrees that the close tracking to the ACWI index should make the ETFs
appealing. "Part of the reason ESG investing has been challenged is investors have assumed that
by taking this approach, they must forgo returns. Having a methodology that has such a close
tracking error to the typical policy benchmark gives investors confidence they can invest in an ESG
framework and yet still meet their return targets,” he said.
The low carbon ETFs are less than a year old, but so far they can be judged a modest success
from the perspective of investor demand and returns. BlackRock’s CRBN appears to be off to a
faster start to date in terms of assets, while LOWC has the edge in performance.

5. Performance of the two ETFs varies because while they both aim to track the Target index, LOWC
owns some 1300 names out of 1,740 held by the index, while CRBN owns around 900 securities.
Inflows have been respectable for both ETFs. Currently, LOWC has roughly $80 million in assets;
CRBN, approximately $200 million.
“We have been pleased with the response from investors to date,” said McNett, noting that it is still
relatively early in the life of the product. “Our client base is just starting to frame carbon exposure as
a risk factor for their portfolios.”
BlackRock’s Williamson noted that the firm had added several institutional investors besides the
U.N. “We continue to see interest from the endowment and foundation community,” he said.
In terms of performance (YTD), LOWC has returned -3.55% (as of Sept. 9, 2015); CRBN returned -
3.91% during the same period. The ACWI Low Carbon Target Index, meanwhile, returned -3.94%.
As for the broad market, the ACWI index's (YTD) return (as of Sept. 9) was -4.52%.
Of course, it is still too early to judge the success of either fund. With climate concerns rising to the
forefront of investor concerns, it’s possible that LOWC and CRBN will attract more attention.
“Generally speaking, we see growing interest in low-carbon strategies on the part of institutional
investors,” said Kuh of MSCI.
From the U.N.’s perspective, the ETFs are a long-term investment that offer the secondary benefit
of advancing policy goals. Already, the pension fund is attracting positive notice from groups
monitoring the environmental arena. In April, for example, the U.N. pension fund jumped from 160th
to 21st place in a ranking by the Asset Owner Disclosure Project, which assesses financial firms,
based on the owners’ commitment to limit risks posed by climate change in their portfolios.
“The United Nations does not generally support commercial products, but in the case of these ETFs
there was a larger purpose,” Yukio Takasu said. “We were trying to send a message and
encourage positive steps toward climate change.”
Organisational Impact
Recently (September 2015), the Asset Owners Disclosure Project, a global nonprofit set up to
encourage institutional investors to support climate risk mitigation, released its rankings of 500
global asset owners in terms of proactivity, transparency and leadership. The U.N. Joint Staff
Pension ranked No. 21 with a single-A rating (third highest).
Email Rich Blake to get a PDF of the "AODP 500" rankings.
Tools, Processes, Suppliers
The exchange-traded funds — the State Street Global Advisors’ SPDR MSCI ACWI Low Carbon
Target ETF (LOWC), and BlackRock’s iShares MSCI ACWI Low Carbon Target ETF (CRBN) —
track the MSCI ACWI Low Carbon Target Index, which aims to produce returns within 30 basis
points of the broader MSCI ACWI index, despite the reduced exposure to carbon heavy companies.
(The MSCI ACWI index includes large and mid-cap stocks across 23 Developed Markets and 23
Emerging Markets countries.)

6. Challenges
ESG remains a relatively small niche within the world of ETF investing, with perhaps 30 ETFs
having some $3 billion under management that follow ESG mandates, estimates Chris Romano, an
analyst with ETF Global.
“Clean energy is not a big focus among ETFs,” agrees Paul Britt, senior analyst with FactSet, who
focuses on ETFs.
This Case Study was written by IIN contributor Riva Atlas along with IIN content director Rich Blake
and Yukio Takasu, the U.N.’s Under-Secretary-General for Management.