BlackRock has announced that the MSCI indices underlying its ‘ESG Enhanced’ range of iShares UCITS ETFs are to be updated to meet the European Union’s Climate Transition Benchmark (CTB) requirement.
Manuela Sperandeo, BlackRock’s EMEA Head of Sustainable Indexing.
The six funds, which track MSCI ESG Enhanced Focus Indices, provide exposure to global developed, US, European, eurozone, Japanese, and emerging market equities.
Collectively, the ETFs house in excess of $10bn assets under management and maintain various European listings including on London Stock Exchange, SIX Swiss Exchange, and Xetra.
The indices’ updated methodology will be effective from 1 December 2021, following MSCI’s Semi-Annual Index Review.
Indices adhering to the CTB requirement have adopted specific objectives related to emission reductions and the transition to a low-carbon economy.
Specifically, these indices must be aligned with a 1.5ºC warming trajectory and require at least an immediate 30% carbon intensity reduction versus their parent universes and a 7% annual decarbonization moving forward.
The updated MSCI indices will also incorporate new and more stringent exclusionary screening based on business activity. These include new conventional weapons and environmental harm screens and an upgrade of the current oil sands screen to an unconventional oil and gas screen.
Existing business screens include nuclear weapons, UN Global Compact violators, tobacco, civilian firearms, and thermal coal.
As a result of the combined changes, all six funds within the range will have their Sustainable Finance Disclosure Regulation (SFDR) classification changed to Article 9, as of 1 December 2021. They will also comply with the requirements of a new industry standard by the BVI, the German Investment Funds Association, for ESG products available for distribution in Germany.
The indices retain MSCI’s existing optimization-based weighting approach which maximizes exposure to environmental, social, and governance factors while maintaining risk and return characteristics of the corresponding parent index, but now with the addition of the CTB requirements.
Specifically, the methodology maintains tracking error targets within 75bps versus the parent MSCI index for developed market exposures and 100bps for emerging market exposures. This enables investors to build sustainable portfolios with core regional ETF building blocks at low cost without compromising performance or target tracking error budgets.
Commenting on the development, Manuela Sperandeo, BlackRock’s EMEA Head of Sustainable Indexing, said: “These improvements to the iShares ESG Enhanced UCITS ETF range raise the standard for incorporating environmental characteristics into sustainable ETFs. For the first time, ESG and climate considerations, in line with EU regulation, are united into a range of ETFs offering a choice of exposures covering global equities.”
Remy Briand, Head of ESG and Climate at MSCI, added: “Incorporation of the EU CTB in the MSCI ESG Enhanced Focus Indices reflects investor demand to drive the transition to a 1.5°C world. The outcome of this consultation enables MSCI to continue to provide industry-leading ESG and Climate Indexes, some of which enable investors to incorporate decarbonization alongside ESG with close alignment to the MSCI parent index.”
The ETFs in the range:
iShares MSCI World ESG Enhanced UCITS ETF (EEWD); $2.0bn AUM; 0.20% expense ratio
iShares MSCI USA ESG Enhanced UCITS ETF (EDMU); $4.7bn; 0.07%
iShares MSCI Europe ESG Enhanced UCITS ETF (EEUD); $930m; 0.12%
iShares MSCI EMU ESG Enhanced UCITS ETF (EMUD); $430m; 0.12%
iShares MSCI Japan ESG Enhanced UCITS ETF (EEJD); $510m; 0.15%
iShares MSCI EM ESG Enhanced UCITS ETF (EEDM); $1.6bn; 0.18%