BlackRock has launched three new equity ETFs in Europe combining a minimum volatility investment approach with environmental, social, and governance (ESG) criteria.
Stephen Cohen, Head of iShares EMEA at BlackRock.
The funds are effectively ESG versions of existing iShares minimum volatility ETFs which collectively house over $7.5 billion in assets under management.
Similar to the existing funds, the new ETFs track MSCI indices providing low volatility exposure to global developed, European, and US equity markets but with an improved overall ESG profile and lower carbon intensity.
All three ETFs have listed on Xetra in euros, while the global and US funds are also available on Euronext Amsterdam in US dollars.
The iShares Edge MSCI World Minimum Volatility ESG UCITS ETF (MVEW NA; MVEW GY) tracks the MSCI World Minimum Volatility ESG Reduced Carbon Target Index and comes with an expense ratio of 0.30%.
The iShares Edge MSCI Europe Minimum Volatility ESG UCITS ETF (MVEE GY) tracks the MSCI Europe Minimum Volatility ESG Reduced Carbon Target Index and has an expense ratio of 0.25%.
The iShares Edge MSCI USA Minimum Volatility ESG UCITS ETF (MVEA NA; MVEA GY) tracks the MSCI USA Minimum Volatility ESG Reduced Carbon Target Index and costs 0.20%.
The funds’ expense ratios are in line with the issuer’s non-ESG minimum volatility strategies, ensuring investors will not pay extra to invest according to socially responsible principles.
Income is accumulated within the portfolios.
Methodology
The funds’ underlying indices are based on MSCI’s main benchmarks for global developed (MSCI World), European (MSCI Europe), and US (MSCI USA) equity markets.
Companies embroiled in severe ESG-related controversies, as well as those with operations in weapons, tobacco, thermal coal, and oil sands are excluded.
The constituents that remain are assigned an ESG score based on the firm’s ability to manage key ESG risks relative to other companies in the same sector. Constituents also have their carbon exposure measured based on the firm’s greenhouse gas emissions and fossil fuel reserves.
The methodology uses an optimization process to reweight securities in order to minimize volatility while simultaneously satisfying several sustainability objectives including a 30% reduction in carbon intensity and a 20% improvement in overall ESG profile relative to the parent universe.
Other constraints that the optimization model considers include limiting the country and sector weight differences relative to the parent universe, providing caps and floors for individual securities, and maintaining index turnover within reasonable limits.
The indices are rebalanced on a semi-annual basis.
Robust demand
The new funds are likely to be well-received by investors, benefitting from both the long-term structural shift to socially responsible investments as well as the current demand for defensive strategies amid ongoing market turmoil.
Inflows into ETFs with sustainable mandates totaled $14.8bn globally during Q1 2020, more than three times the assets gained over the same period last year.
BlackRock forecasts assets invested in sustainable index funds and ETFs to grow five-fold and reach $1.2 trillion over the next decade, driven by four primary factors: recognition that sustainability positively influences risk and returns; better reporting of company data leading to even higher quality ESG indices; lower costs through indexing; and the proliferation of sustainable choices for every portfolio exposure.
BlackRock also notes that its UCITS suite of minimum volatility ETFs has attracted $0.8bn in new assets during the first three months of this year, building on the $1.3bn gathered in 2019. The strategies have delivered their objectives during the current turbulence, outperforming their parent indices by an average 4% (during Q1 2020) by taking less downside exposure while still capturing most of the market’s upside.
Stephen Cohen, Head of iShares EMEA at BlackRock, commented, “As investors take stock of their tactical and strategic positioning, ETFs are playing a central role in portfolios that are increasingly tilted towards ESG criteria. We have seen record growth in our sustainable suite, and we remain focused on building the most comprehensive, innovative set of ESG ETFs to meet and anticipate the needs of investors.”
Philipp Hildebrand, Vice Chairman at BlackRock, added, “The seismic reallocation of assets into sustainable investment strategies is underway and will only accelerate from here. The resilience of sustainable strategy returns amid the ongoing market turmoil, in delivering better portfolio outcomes, is notable and will further fuel demand for sustainable building blocks. Indexed products are enabling large scale integration of sustainable criteria into the portfolios of wealth managers and institutions across the globe, and this is only the start.”