The idea is compelling: a simple, transparent, and cost-effective investment that also contributes to climate protection. By purchasing a climate Exchange Traded Fund, investors can support companies that reduce CO2 emissions and confront the impact of climate change. It's a passive investment that does good. Providers have long picked up on this idea: there are numerous ETFs that track indices aligned with the goals of the Paris Agreement. These indices select stocks from companies that are leaders in CO2 reduction and climate protection.

However, the mere notion of doing something active with a passive investment raises questions. Being passive also means not taking direct influence over the companies you invest in. And that's the crux of the matter: buying a climate ETF alone does not prompt companies to do more for climate protection, nor does it lower their CO2 emissions.

Jonathan Bailey, Global Head of ESG at Neuberger Berman, points out further issues: „It may be tempting to simply follow one of the climate benchmarks to build a net-zero portfolio – but that approach is not effective", he says. It is often forgotten that climate ETFs primarily rely on backward-looking data. This means that companies are evaluated based on their past CO2 performance and ESG commitments. However, this data can be incomplete, making it difficult to assess the actual climate-friendliness of the companies. Furthermore, these figures do not reflect how committed a company will be to climate protection in the future.

Another problem with many climate ETFs is that they often rely on exclusion criteria. Companies deemed particularly harmful to the climate, such as those in fossil fuels, are excluded. At first glance, this may seem reasonable. But this approach deprives those companies of capital that they need to reduce their emissions. Instead of supporting these companies in their transition to a more sustainable economy, they are effectively penalised.

The promise of climate ETFs to support the transition to a more climate-friendly economy is, therefore, rarely fulfilled in practice. Anyone truly wanting to contribute to climate protection should consider whether passive climate ETFs are the right path. The actual impact on climate protection depends not only on the selection of companies, but also on how an asset manager perceives their role. It's about actively engaging in dialogue with companies. It's not just about providing capital. It’s also about influencing company decisions.

Engagement, as practiced by active managers, allows for exerting pressure on companies to ensure they meet their climate goals. Passive ETFs, on the other hand, merely replicate indices. While they do exercise voting rights, real engagement requires more resources, which low-fee ETFs may not necessarily have.

It’s no surprise that impact investments are becoming increasingly popular. They aim precisely at achieving a noticeable effect by selectively investing in companies that demonstrably contribute to CO2 reduction. Climate ETFs, however, offer little of this „impact“. They are a convenient way to make a portfolio appear green, but they contribute less to actual change.

Those who truly want to make a difference should focus on active investments that deliberately invest in companies, and achieve real progress in climate protection through active engagement. True change will not come from passive replication of indices.