BlackRock has broadened its sustainable fixed income offering in Europe with the launch of three ultrashort duration bond ETFs that screen issuers according to environmental, social, and governance (ESG) criteria.
The funds provide exposure to ultrashort, investment-grade corporate bonds while screening out issuers with poor ESG profiles.
The funds, which are effectively ESG alternatives of existing iShares UCITS ETFs, are linked to Markit iBoxx indices and provide exposure to short-duration corporate bonds issued in US dollars, euros, or pound sterling.
The iShares USD Ultrashort Bond ESG UCITS ETF (UEDD NA) has listed on Euronext Amsterdam in US dollars with seed capital of $10 million. The fund tracks the Markit iBoxx ESG USD Liquid Investment Grade Ultrashort Index.
The iShares EUR Ultrashort Bond ESG UCITS ETF (EUED GY) has listed on Xetra in euros with seed capital of €25m. It is linked to the Markit iBoxx ESG EUR Liquid Investment grade Ultrashort Index.
The iShares GBP Ultrashort Bond ESG UCITS ETF (UESD LN) has listed on London Stock Exchange in pound sterling with seed capital of £25m. Its underlying reference is the Markit iBoxx ESG GBP Liquid Investment Grade Ultrashort Index.
Each ETF comes with an expense ratio of 0.09% which matches the fee charged by the funds’ non-ESG counterparts.
Income is distributed to investors on a semi-annual basis.
Methodology
The indices consist of investment-grade corporate bonds, denominated in their respective currencies, issued by industrial, utility, and financial companies. Fixed-rate bonds with less than one year to maturity and floating-rate bonds with under three years to maturity are eligible for inclusion.
ESG risk is mitigated by using data from MSCI ESG Research to screen out issuers involved in weapons, firearms, tobacco, adult entertainment, alcohol, gambling, nuclear power, genetically modified organisms, and fossil fuel, as well as firms that are violators of the UN Global Compact or are embroiled in severe ESG controversies.
The remaining eligible issuers are then assigned an ESG rating on a seven-point scale between ‘AAA’ and ‘CCC’ which indicates the issuer’s ability to deal with ESG risks relative to sector peers. Issuers with ratings below ‘BB’ are excluded.
The remaining issuers constituent the index with issuers weighted by market value subject to a 3% cap per issuer.
According to IHS Markit, the indices offer ethically screened exposure to cash equivalent-plus securities – on the spectrum between traditional money markets and core bond holdings – while maintaining a risk and return profile that is broadly similar to their parent universes.
As of 29 February 2020, the annual yield of the ESG ultrashort indices in USD, EUR and GBP were 1.44%, -0.07% and 0.76%, respectively, while their effective durations were 0.72 years, 0.82 years, and 1.18 years.
Brett Olson, Head of Fixed income iShares EMEA at BlackRock, commented, “Investors are turning to iShares ETFs to access markets and make portfolio allocations quickly and cost-effectively amid market uncertainty, and the trend towards sustainability is weathering the turbulence. The global sustainable ETF industry has attracted $14.3 billion since the start of the year, and we remain committed to providing investors with the choice of investment tools to build resilient portfolios and meet sustainability goals.”