BlackRock has expanded its range of socially responsible ETFs with the launch of the iShares MSCI USA Small-Cap ESG Optimized ETF (ESML US) on Cboe Global Markets. The fund provides exposure to US small-cap stocks which have been screened for strong environmental, social and corporate governance (ESG) characteristics.
The fund provides exposure to a portfolio of US small-cap stocks which has been optimized to enhance exposure to the ESG factor.
The fund tracks the MSCI USA Small Cap Extended ESG Focus Index, which is constructed by selecting constituents from the parent MSCI USA Small Cap Index through an optimization process that maximizes exposure to ESG factors while maintaining risk characteristics similar to the parent index.
The first step in the index’s methodology is to exclude tobacco and controversial weapons companies as well as those firms currently embroiled in business controversies.
Following the school massacre in Parkland, Florida, BlackRock has altered its methodology to entirely exclude makers of civilian firearms or any retailer that earns more than 5% of their total revenue from the sale of civilian firearms.
The second step harnesses ratings from index provider MSCI’s environment, social and governance (ESG) analytics platform – MSCI ESG Research. Each stock is assigned an IVA (Intangible Value Assessment) score based on the firm’s ESG-driven investment risks or opportunities compared to its sector peers.
Constituents are selected and weighted to maximize exposure to higher ESG IVA scores while containing tracking error (relative to the parent index) within 50bps. The index is rebalanced on a quarterly basis in March, June, September and December.
The fund has an expense ratio of 0.17%.
ESML is the eleventh fund within BlackRock’s suite of sustainable ETFs and the fourth “ESG-optimized” fund following previous launches which target US large- and mid-caps, EAFE (Europe, Africa and the Far East) stocks, and emerging market equities.
Interestingly, the iShares MSCI EM ESG Optimized ETF (ESGE US), and the iShares MSCI EAFE ESG Optimized ETF (ESGD US) have proven the most popular with investors, currently holding $280m and $220m in AUM respectively. The iShares MSCI USA ESG Optimized ETF (ESGU US) has $60m AUM.