BlackRock to Include the Climate Transition Index in its ETF Lineup
The enhanced methodology will meet the sustainable taxonomy requirements of BVI, the German investment fund association, as of December 1, 2021. This will provide the largest range of climate-aligned ETFs, with over $9 billion in assets under management across 6 funds. The SFDR classification of the range will change from Article 8 to Article 9 on December 1st, 2021.
The growing demand from investors to integrate climate change issues into their portfolios is leading to an evolution in sustainable investment. In order to provide clients with investment opportunities to support the transition to a low-carbon economy, BlackRock announces that following the mid-year review of the MSCI1 Index, its iShares ESG Enhanced UCITS ETF range will benefit from an update to the benchmarks – the MSCI ESG Enhanced Focus Indexes – as of December 1, 2021, aimed at complying with the requirements of the European Union’s (“EU”) Climate Transition Index (“CTB”), and introducing more stringent exclusions, including on conventional weapons.
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The CTB is a recognized international benchmark, introduced by the EU in April 2020 after consultation with market participants
Aligned with a 1.5°C warming trajectory, this benchmark requires a 30% reduction in carbon intensity compared to the parent index and a 7% annual decarbonization of the index itself. The carbon intensity requirements thus include, for the first time, the carbon emissions of Scope 3. The new filters include conventional weapons2, before the introduction at the end of November 2022 of an environmental damage filter3. In addition, the filter targeting oil sands is evolving into a dedicated filter for unconventional oil and gas4.
As a result of these benchmark changes, all six funds in the lineup will be classified under Article 9 of the SFDR as of December 1st, 2021. The range will also comply with the new industry standard on products available for distribution in Germany, as determined by the BVI5, the German investment fund association.
Manuela Sperandeo, Head of Sustainable Index Management for BlackRock EMEA, said: “Investors can contribute, through their portfolio choices, to an effective response to climate change. These enhancements to the iShares ESG Enhanced UCITS ETF range raise the level of integration of environmental features within sustainable ETFs. For the first time, a range of ETFs covering global equities integrates ESG and climate change issues in line with EU regulations. We always ensure that we align ESG ETFs with the latest sustainable investment standards and offer our clients a wide range of options to implement their sustainability goals.”
The iShares ESG Enhanced UCITS ETF lineup has a TER as low as non-ESG products, and upgrades to the index methodology have been designed to maintain tracking error targets of 75 bps versus the parent index for developed market exposures (100 bps for emerging markets). These key features allow investors to replace their traditional investments with sustainable investments by creating sustainable portfolios from regional ETFs at a reasonable cost and without compromising performance or tracking error budgets.
MSCI Index methodology
The updated methodology retains the existing approach – based on MSCI’s optimization to maximize environmental, social and governance (ESG) exposure while maintaining the risk and return characteristics of the parent index – but now incorporates the requirements set by the EU Climate Transition Index (CTB). Existing screens include controversial weapons, nuclear weapons, products in violation of the UN Global Compact, tobacco, civilian firearms, thermal coal and oil sands.
Rémy Briand, Head of ESG and Climate at MSCI, said: “The inclusion of the EU BTC in the MSCI ESG Enhanced Focus indices reflects the willingness of investors to support the transition to a 1.5°C world. The outcome of this consultation allows MSCI to continue to provide innovative ESG and climate indices, some of which allow investors to integrate decarbonization alongside ESG issues, with close alignment to the parent MSCI index.”
BlackRock’s approach to climate investment
BlackRock has identified three distinct approaches to climate investment: Reduce, Prioritize and Target. Funds in the “Reduce” category limit a portfolio’s exposure to the largest carbon emitters and may apply strict fossil fuel criteria. We believe these funds can be used as general components of a diversified portfolio.
Funds in the “Prioritize” category allocate capital based on a company’s or government’s actions and commitments to transition (e.g., actors reducing their reliance on fossil fuels and setting science-based targets). In particular, these funds integrate climate data into the investment process. Finally, funds in the “Target” category invest in a specific sustainable activity or project that supports environmental goals (e.g. green bonds). The iShares ESG Enhanced UCITS ETFs will fall into the “Prioritize” category of climate investment approaches.
(Featured image by Nazir Amin CC BY-SA 2.0 via Flickr)
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