Funds Group: iShares
Management Company: BlackRock Fund Advisors (BFA)
Funds Affected: (1) iShares Global Clean Energy ETF (2) iShares MSCI ACWI Low Carbon Target ETF (3) iShares ESG U.S. Aggregate Bond ETF (4) iShares MSCI KLD 400 Social ETF, (5) iShares MSCI USA ESG Select ETF, (6) iShares ESG MSCI USA ETF (On October 23, 2018, the name of the fund changed from the iShares MSCI USA ESG Optimized ETF), (7) iShares ESG MSCI EM ETF, iShares MSCI EAFE ESG ETF, (8) iShares MSCI Global Impact ETF
Principal Sustainable Investment Strategies: (1-2) Thematic Investing, (3-7) ESG integration and negative screening (exclusions). (8) Thematic/impact investing and ESG integration.
Summary:
(1) The fund seeks to replicate the investment performance results of the S&P Global Clean Energy Index which tracks the performance of approximately 30 of the most liquid and tradable securities of global companies involved in clean energy related businesses. The index constituents includes clean energy production companies, and clean energy equipment and technology providers, and the Fund is concentrated in the clean energy industry. For these purposes, “clean energy” sources include biofuel and biomass, ethanol and fuel alcohol, geothermal energy, hydroelectricity, and solar and wind energy.
The fund’s corollary documents provide metrics sourced to MSCI that (1) attempts to quantify the underlying fund’s holdings to manage key medium and long-term risks and opportunities arising from environmental, social and governance factors (ESG Quality Score) and (2) seeks to reflect the extent to which company revenues is exposed to products and services that help solve the world’s major social and environmental challenges in the form of a sustainable impact percentage.
(2) The fund seeks to invest in companies that are associated with low carbon exposure, along two dimensions of carbon exposure – carbon emissions and potential carbon emissions from fossil fuel reserves. By overweighting companies with low carbon emissions relative to sales and those with low potential carbon emissions from fossil fuel reserves relative to market capitalization, the Underlying Index aims to reflect a lower carbon exposure than that of the broad market. Carbon emissions and potential carbon emissions from fossil fuel reserves are measured based on an issuer’s reported data from annual reports, corporate social responsibility reports, the Carbon Disclosure Project, oil and gas industry bodies, and other relevant third-party sources. If an issuer does not report carbon emissions or potential carbon emissions from fossil fuel reserves, the data are estimated by MSCI using a proprietary model.
(3) Based on environmental, social and governance (ESG) rating inputs provided by MSCI ESG Research LLC, the portfolio consists of bonds from issuers generally evaluated for favorable ESG practices that are combined in the portfolio in a way that maximizes exposure to securities of entities with higher MSCI ESG Research ratings while at the same time maintaining the risk and return characteristics of the index that the fund seeks to replicate. Also, excluded from the portfolio are securities of entities involved in the business of tobacco, entities involved with controversial weapons, producers and retailers of civilian firearms, as well as entities involved in very severe business controversies (in each case as determined by MSCI ESG Research).
For each industry, MSCI ESG Research identifies key ESG issues that can lead to substantial costs or opportunities for entities (e.g., climate change, resource scarcity, demographic shifts). MSCI ESG Research then rates each entity’s exposure to each key issue based on the entity’s business segment and geographic risk and analyzes the extent to which entities have developed robust strategies and programs to manage ESG risks and opportunities. MSCI ESG Research scores entities based on both their risk exposure and risk management. To score well on a key issue, MSCI ESG Research assesses management practices, management performance (through demonstrated track record and other quantitative performance indicators), governance structures, and/or implications in controversies, which all may be taken as a proxy for overall management quality. Controversies, including, among other things, issues involving anti-competitive practices, toxic emissions and waste, and health and safety, occurring within the last three years lead to a deduction from the overall management score on each issue. Using a sector-specific key issue weighting model, entities are rated and ranked in comparison to their industry peers. Key issues and weights are reviewed at the end of each calendar year. Corporate governance is always weighted and analyzed for all entities.
In addition to corporate and government bonds subject to ESG ratings as described above, the portfolio also consists of U.S. fixed-rate agency MBS securities issued by entities such as the Government National Mortgage Association (Ginnie Mae), the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac) and are backed by pools of mortgages. As of September 4, 2018, about 28% of the bonds fell into this category. These U.S. fixed-rate agency MBS exposure does not receive any MSCI ESG Research rating in line with the belief that U.S. fixed-rate agency MBS exposure is neither additive nor decremental to the portfolio’s ESG rating profile and as such is considered ESG neutral and not inconsistent with an ESG focused exposure.
(4) Companies are screened for positive environmental, social and governance (ESG) characteristics, based on MSCI’s analysis of each eligible company’s ESG performance using proprietary ratings covering ESG criteria. Companies that MSCI determines have significant involvement in the following businesses are not eligible: alcohol, tobacco, gambling, civilian firearms, nuclear power, controversial weapons, nuclear weapons, conventional weapons, adult entertainment and genetically modified organisms.
(5) (6) Companies are screened for favorable environmental, social and governance (ESG) characteristics as determined by MSCI, but excluding securities of companies involved in the business of tobacco, companies involved with controversial weapons, producers and retailers of civilian firearms, as well as companies involved in very severe business controversies as determined by MSCI.
Fund seeks to maximize exposure to securities of companies with higher ESG ratings, subject to maintaining certain risk and return characteristics.
For each industry, key ESG issues are identified that can lead to unexpected costs for companies in the medium- to long-term. The size of each company’s exposure to each key issue is calculated based on the company’s business segment and geographic risk and analyzed the extent to which companies have developed robust strategies and programs to manage ESG risks and opportunities. Using a sector-specific key issue weighting model, companies are rated and ranked in comparison to their industry peers.
(7) Fund invests in companies that have favorable environmental, social and governance (“ESG”) characteristics, as determined by MSCI. The index excludes securities of companies involved in the business of tobacco, companies involved with controversial weapons, producers and retailers of civilian firearms, as well as companies involved in very severe business controversies (in each case as determined by MSCI).
(8) The fund and its underlying index is composed exclusively of companies whose core business addresses at least one of the world’s major social and environmental challenges, as defined by the United Nations Sustainable Development Goals (“UN SDGs”). Examples of sustainable impact categories within the UN SDGs include nutritious food, treatment of major diseases, sanitary products, education, affordable housing, energy efficiency, green building, sustainable water, and pollution prevention. To be eligible for inclusion in the index, companies must generate at least 50% of their annual sales from one or more of the sustainable impact categories and maintain minimum environmental, social and governance (“ESG”) standards.
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