The Most Sustainable ETF from iShares/BlackRock
We will take you through a few easy steps to help you find, select and invest on the most sustainable ETF from iShares. But first let’s start with the reasoning behind it and some basic concepts.
Why invest in sustainable ETFs?
In 2016, the Paris Agreement came into force as a global response to the climate change threat. Together all UNFCCC members (189 countries) committed to hold the global average temperature increase well below 2.0°C and to pursue efforts to limit the increase to 1.5°C above preindustrial levels. This global effort is necessary to avoid the potential spiral effect of disastrous environmental impacts on Earth and consequently on society. Governments, and especially corporations, need to act now by making the correct decisions to mitigate environmental and social risks.
Driven by the pressuring threat of climate change combined with investors’ desire to manage their long-term risk exposure in capital markets, enters ESG (Environmental, Social, and Governance) a framework that can be used to assess and select sustainable ETFs and equities in the stock market.
The ESG term was first used “in 2005 in a landmark study entitled “Who Cares Wins.”. Later MSCI implemented its framework to enable rating corporations on Environmental, Social and Governance criteria. By using this framework companies can be compared on their sustainability efforts, which can be characterized as a “superior risk-adjusted return”.
There is already a huge trend of investors demanding ESG compliance and transparency, including ESG reports. But there is also a growing demand for ESG investment products such as indexes and funds. We, as investors, know that one of the ways to influence future decisions of companies is to make changes where it hurts, i.e. directly in their pockets.
ESG ETFs are booming and will continue to grow in the next decade
BlackRock’s iShares is the largest ETF issuer in the world, closely followed by Vanguard. iShares has raised $17 billion in their ESG lines and has a total of 105 ESG ETFs and index funds. The number of funds is expected to grow to 120 during 2020 and to 150 during 2021.
The European market of ESG ETFs is the one growing the fastest. BlackRock expects European assets to grow from $12 billion in 2020 to $250 billion in 2028, while the global sustainable ETFs and index funds will boost assets to $1.2 trillion by 2030.
BlackRock bets in four forces to achieve this ambitious target:
- Recognition that sustainability influences risk and returns
- Better data leading to better indexes
- Access to ESG at a fraction of the cost through indexation
- Sustainable choices for every portfolio
Besides BlackRock’s forecasts and a market consensus of the ESG growth, JP Morgan also said that COVID-19 can further accelerate the ESG trend due to investors’ demand for greater corporate transparency and stakeholder accountability.
What are sustainable ETFs?
To select the most sustainable ETFs, we could narrow down our search to ETFs with ESG in their name. However, there is not a consensus on the market on how to classify sustainable ETFs. Terms such as SRI (Socially Responsible Investment), ESG (Environmental, Social and Governance), Sustainable, Green, Clean Energy, etc. are used interchangeably.
For this article, we will include all iShares sustainable ETFs in the search.
Which iShares sustainable ETFs are available?
iShares (BlackRock) distinguishes its ESG ETFs in three levels:
- Screened: removes controversial business areas by screening out seven sectors: controversial weapons, nuclear weapons, UN Global Compact violators, thermal coal, tobacco, civilian firearms, tobacco, and oil sands
- Enhanced: focus on companies with strong ESG ratings and lower carbon footprints, while limiting the tracking error target from the traditional benchmark
- SRI: focus on companies in the top 25% of each sector based on value-based screening of ESG scores and excludes controversial business areas
However, it is important to look beyond the definitions above to make sure we are not missing any sustainable ETFs in the selection process.
Selecting the best sustainable ETF among iShares’ long-list of +100 active ETFs can be a daunting process. However, applying a few selections steps, we can quickly narrow down our options.
Investment strategy: Luckily, iShares database can be filtered by investment strategy. Activating the filter “Sustainable” results in 89 sustainable ETF funds.
Asset class: Focusing on equity ETFs only, removes 23 fixed-income ETFs from the list, resulting in 66 sustainable ETFs.
Geographic exposure: To maximize diversification and to have a significant number of holdings to minimize volatility, select “Global” exposure. This brings the results down to 30 sustainable ETFs.Long-list of selected sustainable ETFs from iShares
|iShares ESG MSCI EAFE ETF||Sustainable||Global, ex. US & Canada|
|iShares MSCI World SRI UCITS ETF EUR (Acc)||Sustainable||Global|
|iShares MSCI World SRI UCITS ETF USD (Dist)||Sustainable||Global|
|iShares MSCI World ESG Screened UCITS ETF USD (Acc)||Sustainable||Global|
|iShares MSCI World ESG Screened UCITS ETF USD (Dist)||Sustainable||Global|
|iShares MSCI ACWI Low Carbon Target ETF||Sustainable||Global|
|iShares MSCI World ESG Enhanced UCITS ETF USD (Acc)||Sustainable||Global|
|iShares MSCI World ESG Enhanced UCITS ETF USD (Dist)||Sustainable||Global|
|iShares Refinitiv Inclusion and Diversity UCITS ETF||Sustainable||Global|
|iShares MSCI Global Impact ETF||Sustainable||Global|
|iShares Edge MSCI World Minimum Volatility ESG UCITS ETF USD (Acc)||Sustainable||Global|
|iShares Dow Jones Global Sustainability Screened UCITS ETF USD (Acc)||Sustainable||Global|
|iShares MSCI EM IMI ESG Screened UCITS ETF USD (Dist)||Sustainable||Emerging Markets|
|iShares MSCI EM IMI ESG Screened UCITS ETF USD (Acc)||Sustainable||Emerging Markets|
|iShares MSCI EM ESG Enhanced UCITS ETF USD (Acc)||Sustainable||Emerging Markets|
|iShares MSCI EM ESG Enhanced UCITS ETF USD (Dist)||Sustainable||Emerging Markets|
|iShares ESG MSCI EM ETF||Sustainable||Emerging Markets|
|iShares MSCI EM SRI UCITS ETF USD (Acc)||Sustainable||Emerging Markets|
|iShares MSCI EM SRI UCITS ETF USD (Dist)||Sustainable||Emerging Markets|
|iShares MSCI EM Islamic UCITS ETF USD (Dist)||Sustainable||Emerging Markets|
|iShares Automation & Robotics UCITS ETF USD (Dist)||Thematic||Global|
|iShares Automation & Robotics UCITS ETF USD (Acc)||Thematic||Global|
|iShares Healthcare Innovation UCITS ETF USD (Acc)||Thematic||Global|
|iShares Digitalisation UCITS ETF USD (Acc)||Thematic||Global|
|iShares Ageing Population UCITS ETF USD (Acc)||Thematic||Global|
|iShares Smart City Infrastructure UCITS ETF USD (Acc)||Thematic||Global|
|iShares Smart City Infrastructure UCITS ETF USD (Dist)||Thematic||Global|
|iShares Global Clean Energy ETF||Thematic||Global|
|iShares MSCI World Islamic UCITS ETF USD (Dist)||Thematic||Global|
|iShares Global Clean Energy UCITS ETF USD (Dist)||Thematic||Global|
Disclaimer: The list above represents exchange-traded funds domiciled outside the U.S. and are targeting non-US based investors. Investors domiciled in the US might not have access to all the ETFs listed in this article.
Notice however that there are 8 ETFs with exposure to Emerging Markets (EM) and 10 thematic ETFs, focusing on a specific industry (e.g. Automation & Robotics, Healthcare, Clean Energy). By removing those 18 ETFs, we are down to 12 sustainable ETFs.
TER (Total Expense Ratio): If you are looking for a long-term investment, it is important to keep administration costs low. We recommend selecting TER below 0.30%, or even below 0.20%, if possible. As a reference, Vanguard which is known for having extremely low TER charges 0.03% for its VTI (Vanguard Total Stock Market ETF).
We have made a review of Vanguards ESG ETFs and identified the main reasons why they are not sustainable enough
Excluding TER above 0.30%, and disregarding the dividend strategy (merging similar ETF products with either accumulating or distributing dividend strategy), results in the list below with 7 ETFs:
|iShares ESG MSCI EAFE ETF||Sustainable||Global excluding US & Canada||0.20%|
|iShares MSCI World SRI UCITS ETF EUR (Acc/Dist)||Sustainable||Global||0.20%|
|iShares MSCI World ESG Screened UCITS ETF USD (Acc/Dist)||Sustainable||Global||0.20%|
|iShares MSCI ACWI Low Carbon Target ETF||Sustainable||Global||0.20%|
|iShares MSCI World ESG Enhanced UCITS ETF USD (Acc/Dist)||Sustainable||Global||0.20%|
|iShares Edge MSCI World Minimum Volatility ESG UCITS ETF USD (Acc)||Sustainable||Global||0.30%|
|iShares MSCI Global Impact ETF (see note)||Sustainable||Global||0.49%|
|iShares Global Clean Energy ETF||Sustainable||Global||0.46%|
|iShares Dow Jones Global Sustainability Screened UCITS ETF USD (Acc)||Sustainable||Global||0.60%|
Note on ‘iShares MSCI Global Impact ETF’ (SDG): This ETF has a high sustainability potential since it has exposure to global stocks that focus on advancing the United Nations Sustainable Development Goals. Considering its impact investing potential, and despite its high TER, we will keep it in the list for the next assessment step, where we will assess the sustainability KPIs of each one of the selected ETFs.
How to select your iShares sustainable ETF?
iShares discloses the ETF Sustainable Characteristics at each investment product page. The characteristics are non-financial metrics that assess each ETF on their environmental, social and governance (ESG) performance. The metrics are based on MSCI Fund Ratings which considers:
- MSCI Fund Rating (AAA-CCC): Calculated as a direct mapping of ESG Quality Scores to letter rating categories (e.g. AAA = 8.6-10). The ESG Ratings range from leader (AAA, AA), to average (A, BBB, BB) to laggard (B, CCC)
- MSCI ESG Quality Score – Peer Percentile: The fund’s ESG Percentile compared to its Lipper peer group
- MSCI ESG Quality Score (0-10): Calculated using the weighted average of the ESG scores of fund holdings. MSCI rates underlying holdings according to their exposure to 37 industry-specific ESG risks and their ability to manage those risks relative to peers
- MSCI ESG % Coverage: Percentage of a fund’s holdings that have MSCI ESG rating data
- MSCI Weighted Average Carbon Intensity (tonsCO2e/$m sales): Measures a fund’s exposure to carbon-intensive companies. Represents the estimated greenhouse gas emissions per USD 1 million in sales across the fund’s holdings
|ETF Name||MSCI ESG Fund Rating||MSCI ESG Quality Score (0-10)||MSCI ESG % Coverage||MSCI Weighted Average Carbon Intensity |
(Tons CO2E/$M SALES)
|iShares ESG MSCI EAFE ETF||AA||8.3||100.00%||102.24|
|iShares MSCI World SRI UCITS ETF EUR (Acc/Dist.)||AA||7.86||99.93%||61.45|
|iShares MSCI World ESG Screened UCITS ETF USD (Acc/Dist)||A||6.59||99.66%||95.07|
|iShares MSCI ACWI Low Carbon Target ETF||A||6.5||99.65%||54.37|
|iShares MSCI World ESG Enhanced UCITS ETF USD (Acc/Dist)||AA||7.82||99.76%||106.65|
|iShares Edge MSCI World Minimum Volatility ESG UCITS ETF USD (Acc)||A||6.49||100.00%||360.7|
|iShares MSCI Global Impact ETF||AA||7.9||99.91%||160.07|
The top 2 sustainable ETFs with at least three strong sustainable characteristics are iShares ESG MSCI EAFE ETF and iShares MSCI World SRI UCITS ETF EUR (Acc/Dist.). The first one has the best MSCI ESG Quality Score, while the latter has a lower carbon intensity. Considering the importance of reducing CO2 emissions for mitigating climate change impacts, and despite not having ESG in its name, we appoint ‘iShares MSCI World SRI UCITS ETF EUR’ or SUSW as the most sustainable ETF from iShares. It has an ESG fund rating of AA, an ESG Quality score of 7.86 out of 10, and an extremely low carbon intensity of only 61.45 tons of CO2e per million USD of sales.
Currently the top 10 holdings of SUSW are:
|Name of security||Weight (%)|
|Procter & Gamble||3.09%|
|Home Depot Inc||2.76%|
|Roche Holding Par AG||2.54%|
|ASML Holding NY||1.70%|
If you would like to have a more regional exposure, or create your global portfolio, using the table below you can benchmark SUSW against equivalent sustainable ETFs with regional exposure (USA, Europe, Japan, and Emerging Markets) and compare it against its core non-sustainable equivalent ETF (SWDA).
|ETF Name||Bloomberg Ticker||Strategy||Region||TER||MSCI ESG Fund Rating||MSCI ESG Quality Score (0-10)||MSCI ESG % Coverage||MSCI Weighted Average Carbon Intensity|
|iShares MSCI World SRI UCITS ETF EUR (Acc/Dist.)||SUSW||Sustainable||Global||0.20%||AA||7.86||99.93%||61.45|
|iShares MSCI USA SRI UCITS ETF||SRIL||Sustainable||USA||0.20%||AA||7.49||100.00%||60.33|
|iShares MSCI Europe SRI UCITS ETF||IESE||Sustainable||Europe||0.20%||AAA||8.84||100.00%||59.56|
|iShares MSCI Japan SRI UCITS ETF||SUJP||Sustainable||Japan||0.20%||AAA||8.76||100.00%||46.78|
|iShares MSCI EM SRI UCITS ETF||SUSM||Sustainable||Emerging Markets||0.25%||A||6.85||99.56%||146.42|
|iShares Core MSCI World UCITS ETF||SWDA||Core||Global||0.20%||A||6.57||99.44%||157.52|
From the list above, the best-in-class regarding sustainability with triple ‘AAA’ ratings and extremely low carbon intensity are iShares MSCI Europe SRI UCITS ETF (IESE) and iShares MSCI Japan SRI UCITS ETF (SUJP).
The sustainability ratings for iShares Core MSCI World UCITS ETF (SWDA) are not far from iShares MSCI EM SRI UCITS ETF (SUSM), however, risk exposure and diversification are vastly different among those two ETFs.
Do iShares sustainable ETFs perform better than traditional ETFs?
ESG is a relatively recent framework and there is yet no market consensus across rating agencies (MSCI, Sustainalytics, Vigeo SAS, etc.) on how ESG should be assessed or which metrics should be used to assess ESG materiality of each company, ETF or fund.
Moreover, except for iShares MSCI Europe SRI UCITS ETF EUR created in 2011, most iShares sustainable ETFs were created after 2016, resulting in less than 5 years of historical performance.
The long-term performance of sustainable ETFs must still prove itself. However, its intrinsic “superior risk-adjusted return” and good governance practices demanded by ESG criteria are a good indication of a promising long-term performance.
A more recent study from Visual Capitalist assessed the performance of ESG during the beginning of COVID-19 outbreak (Jan-Mar 2020). Within the MSCI All Country World Index (ACWI), ESG leaders saw losses that were nearly six percentage points smaller than the index, while for S&P 500, “ESG leaders had returns that were almost 9 percentage points better than the index”.
More specifically comparing iShares MSCI World SRI UCITS ETF EUR (SUSW) and iShares Core MSCI World UCITS ETF, since October 2017 (inception date of the SUSW ETF), we have the following performance:
From 16 October 2017 to 17 July 2020, SUSW outperformed SWDA by +19.4%. During the last 12 months, SUSW has a return of +9.9%, while SWDA had a return of +4.5%.
ESG or sustainable investing will continue to grow during the next decade. More companies are expected to comply with ESG criteria and more sustainable investment products are expected to be launched in the market. Investors should be aware of how the funds are created and how to distinguish the good ones from the bad ones among the several ETFs options. Moreover, in the sustainable space, there is always the risk of greenwashing, where ETFs offered to investors are potentially not as clean or “green” as expected.
If you are looking for a safe, well-diversified, low-cost sustainable ETF with high ESG ratings, then the ‘iShares MSCI World SRI UCITS ETF EUR’ or SUSW should be part of your portfolio as the most sustainable ETF from iShares (BlackRock).
Not an investment advice: The information provided on this website is intended for general information purposes only and does not constitute investment advice, financial advice, trading advice, or any other sort of advice. You should conduct your due diligence and, if necessary, consult a qualified independent financial advisor before making any investment decisions.
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