BlackRock has launched a new socially responsible ETF providing exposure to emerging market equities with strong environmental, social, and governance (ESG) characteristics relative to their sector peers.
The fund provides exposure to ESG leaders within each sector of the MSCI Emerging Markets Index.
The iShares ESG MSCI EM Leaders ETF (LDEM US) has listed on Nasdaq Exchange and comes with an expense ratio of 0.16%.
The fund is the firm’s second ETF to harness MSCI’s ESG Leaders methodology, following the iShares ESG MSCI USA Leaders ETF (SUSL US) which launched in May 2019 and has since grown its AUM to over $1.9bn.
Methodology
The ETF tracks the MSCI EM Extended ESG Leaders 5% Issuer Capped Index through direct physical replication using a sampling methodology.
The index is based on the parent MSCI Emerging Markets Index which captures large and mid-cap representation across 26 emerging market countries.
Using insights from MSCI ESG Research, the methodology first excludes companies with business activities in the alcohol, tobacco, gambling, nuclear power, and weapons industries as well as firms that are embroiled in severe ESG-related controversies.
The remaining constituents are assigned an ESG score between AAA and CCC based on the most relevant ESG factors by industry and risk exposure. The rating process aims to identify ESG leaders and laggards within each industry.
The index selects the securities with the highest ESG scores while targeting a 50% sector representation versus the parent MSCI Emerging Markets Index. Firms with ratings below BB are not eligible for inclusion. Chosen constituents are weighted by free float-adjusted market cap subject to a single issuer cap of 5%. The index is reconstituted annually in May.
The fund has been seeded with $600 million from Ilmarinen, Finland’s largest pension insurance company.
Anna Hyrske, Head of Responsible Investments at Ilmarinen, said, “Responsibility has been an integral part of Ilmarinen’s investment activities for a long time now, and it is incorporated in our decision-making. However, many markets have been lacking a usable index fund that would integrate ESG aspects – environmental, social and governance impacts – at a sufficient level. We have contributed to developing these products, because the ones previously available on the market did not optimally integrate ESG from our perspective.”
The fund is going head-to-head with the Xtrackers MSCI Emerging Markets ESG Leaders Equity ETF (EMSG US) which tracks a very similar index except issuer caps are not enforced. It comes with a slightly higher expense ratio of 0.20%.