Global exchange-traded fund provider iShares has expanded its suite of sustainable funds in the US with the launch of two new ETFs tracking Environment, Social & Governance (ESG) indices as investors look to enhance their portfolios with ESG exposures.
Deborah Winshel, Managing Director and Global Head of BlackRock Impact.
The iShares MSCI EAFE ESG Select ETF tracks the MSCI EAFE ESG Select Index, providing access to large-and-mid-cap stocks in Europe, Asia and Australia, while the iShares MSCI EM ESG Select ETF tracks the MSCI EM ESG Select Index which includes large-and mid-cap emerging market stocks.
The new funds are the second and third US-listed iShares ETFs to harness MSCI’s environmental, social and governance (ESG) company research, joining the $380m iShares MSCI USA ESG Select ETF (NYSE Arca: KLD), launched in January 2005.
Deborah Winshel, Managing Director and Global Head of BlackRock Impact, said: “Clients have repeatedly asked us for solutions to optimize their portfolios for ESG considerations. With the launch of ESGD and ESGE, we introduce new tools that bring sustainable investing into the centre of portfolio construction. The ability to optimize core holdings for ESG outcomes will enable more investors to incorporate their social values into their investment portfolios.”
Martin Small, Managing Director and Head of US iShares at BlackRock, added: “The launch of ESGD and ESGE further strengthens our suite of sustainable exchange traded funds, broadening the geographic possibilities for investors seeking to access equities through an ESG lens. We are seeing growing demand from investors who are looking to focus on positive ESG factors while seeking global equity market returns.”
The underlying indices are designed to maximize exposure to positive ESG factors while exhibiting risk and return characteristics similar to those of a broad market cap-weighted index. Each index is sector-diversified and targets companies with high ESG ratings within each sector.
The methodology behind the MSCI ESG indices start by excluding tobacco and controversial weapons companies from starting constituents. Also excluded automatically are companies embroiled in ongoing controversies regarding their business practices (until the issues are resolved).
Once these initial exclusions are made, the remaining companies undergo the ‘MSCI ESG Intangible Value Assessment (IVA)’, which involves analysing each company’s ability to respond to ESG-related risks and opportunities through a granular break-down of its business segments.
The final weightings of the constituents within each index are derived through an optimization process that aims to maximise exposure to firms with high IVA scores while also providing adequate total market representation and sector diversification. Each index is reviewed on a quarterly basis in January, April, July and October.
MSCI also recently launched new ESG metrics to enhance its evaluation of the ability of firms to offer impact solutions – products and services which actively help to address major ESG issues. While many previous methodologies focus on screening out companies with poor records on ESG issues, such developments aim to better analyse firms who are leaders in offering positive change in society.
Jana Haines, Managing Director and Head of Americas Index Products for MSCI, said: “MSCI has been at the forefront of integrating ESG data into benchmarks. Our ESG research expertise supports the creation of an expanding family of ESG benchmarks. These benchmarks can provide insight for those institutional investors who believe ESG data can enhance investment decisions and for those who want to align their portfolios with their long term values. We are pleased to work with BlackRock to expand their range of iShares ESG ETFs.”
As of 1 July 2016, the iShares MSCI EAFE ESG Select ETF has significant country exposure to Japan (23.0%), the UK (19.0%), France (10.0%), Switzerland (9.6%) and Germany (8.6%). The largest sector exposures are to financials (23.2%), industrials (14.5%), health care (12.5%), consumer discretionary (11.8%) and consumer staples (11.7%). The largest holding is Roche Holding with a 3.1% weighting. The fund’s total expense ratio (TER) is 0.40%.
The index’s performance suggests the methodology may be effective in reducing exposure to undesirable risk characteristics and thereby improving risk/return characteristics compared to a suitable benchmark; the fund’s index is down 0.1% year-to-date (YTD), as of 31 May 2016, compared to -0.8% for its benchmark, the MSCI EAFE Index. Over the past three years the index has had an annualised standard deviation of 12.9%, compared to 13.3% for its benchmark.
The iShares MSCI EM ESG Select ETF has significant country exposure to China (24.9%), South Korea (14.4%), Taiwan (11.8%), India (8.2%) and South Africa (7.8%). The largest sector exposures are to financials (27.2%), information technology (24.6%), consumer discretionary (9.5%), energy (7.6%) and telecommunication services (7.0%). The largest constituent is Taiwan Semiconductor with a 3.8% weighting. The fund’s TER is 0.45%.
The fund’s index has also outperformed its benchmark recently in both risk and return characteristics. The index is up 2.9% between the start of the year and 31 May 2016, compared to 2.3% for its benchmark, the MSCI Emerging Markets Index. The index has an annualised standard deviation of 16.6% compared to 16.7% for its benchmark over the past three years.
With the launch of the new funds, iShares suite of sustainable ETFs comprises seven funds, representing over $1.2bn in assets. The other ETFs include the:
iShares Global Clean Energy ETF (Nasdaq: ICLN), TER: 0.47%
iShares MSCI KLD 400 Social ETF (NYSE Arca: DSI), TER: 0.50%
iShares MSCI USA ESG Select ETF (Nasdaq: KLD), TER: 0.50%
iShares MSCI ACWI Low Carbon Target ETF (NYSE Arca: CRBN), TER: 0.20%
iShares Sustainable MSCI Global Impact ETF (MPCT), TER: 0.49%
The emerging importance and increasing adoption of values-based investment styles is a leading trend in investment finance at the moment, as evidenced by record revenue growth in MSCI’s ESG research and indexing business segment. Reporting in March of this year, the firm notes that revenues grew by 33% over 2015 to $38m and, across its product range, MSCI now serves 47 of the top 50 global asset managers by AUM.