BlackRock has tweaked the indices underlying its European domiciled range of socially responsible investment (SRI) equity ETFs.

BlackRock’s iShares SRI ETFs now exclude issuers exposed to fossil fuels and cap exposure to any single stock at 5%.

The funds, which include global developed, US, Europe, Japan, and emerging market equity exposures, have switched from tracking straight MSCI SRI Indexes to MSCI SRI Select Reduced Fossil Fuel Indexes.

The newly adopted indices include an additional business involvement screen that excludes firms with exposure to fossil fuels.

They also incorporate a 5% cap on any single stock with the aim of reducing concentration risk.

The changes have resulted in some noteworthy alterations to the funds’ constituent, sector, and, where applicable, country weights.

Index methodology

The new indices harness data from MSCI’s in-house ESG research division and are based on the equity universes of  MSCI’s Global Investable Market Indexes.

The methodology first excludes companies involved in nuclear power, tobacco, alcohol, gambling, military weapons, civilian firearms, GMOs, and adult entertainment. A fossil fuels business screen then excludes firms with exposure to fossil fuels through by way of extraction & production, power generation, or reserves ownership.

The companies that remain are then assigned an ESG rating which indicates a company’s ability to deal with ESG risks relative to sector peers. Firms with ratings below average are excluded.

The process then seeks to form a best-in-class index with risk characteristics similar to the relevant parent index. For the US, Europe, and Japan indices, it does this by selecting companies from each sector with the highest ESG ratings that make up approximately 25% of the total market capitalization of that sector. Stocks are weighted by free float-adjusted market capitalization, subject to the new 5% issuer cap.

For the global developed and emerging market indices, the methodology applies the above process to the regional carve-outs of their corresponding parent indices and then aggregates them together.

The funds

The iShares MSCI World SRI UCITS ETF (SUWS LN) tracks the MSCI World SRI Select Reduced Fossil Fuel Index. The new index consists of 374 constituents (vs. 392 in the previous index). The largest country exposures are the US (57.2% vs. 59.5%), Japan (8.7% vs. 7.7%), Germany (5.7% vs. 4.7%), and Australia (4.0%). The largest sector exposures are financials (17.3% vs. 15.0%), health care (15.1% vs. 13.1%), information technology (14.0% vs. 18.0%), industrials (13.1% vs. 11.4%), and consumer staples (12.2% vs. 10.4%). Microsoft, which accounts for a 9.5% weight in the old index, now holds a weight of just 4.5%. The fund has $100m AUM and comes with an expense ratio of 0.30%.

The iShares MSCI USA SRI UCITS ETF (SUAS LN) tracks the MSCI USA SRI Select Reduced Fossil Fuel Index. The new index consists of 139 constituents (vs. 150 in the previous index). The largest sector exposures are health care (17.5% vs. 13.8%), financials (15.7% vs. 12.3%), information technology (14.6% vs. 24.3%), consumer discretionary (12.6% vs. 11.1%), and industrials (12.6% vs. 10.0%). Here too the new index reduces exposure to Microsoft which accounts for a 15.9% weight in the old index and a weight of 4.5% in the new index. The fund has $1.5 billion AUM and also comes with an expense ratio of 0.30%.

The iShares MSCI Europe SRI UCITS ETF (IESG LN) tracks the MSCI Europe SRI Select Reduced Fossil Fuel Index. The new index consists of 109 constituents (vs. 113 in the previous index). The largest country exposures are Germany (23.5% vs. 19.9%), France (16.9% vs. 20.0%), the UK (13.6% vs. 15.6%), the Netherlands (11.6% vs. 6.6%), and Switzerland (10.9% vs. 13.6%). The largest sector exposures are financials (19.5% vs. 16.7%), consumer staples (15.9% vs. 12.8%), industrials (14.0% vs. 11.7%), health care (13.4% vs. 15.8%), and consumer discretionary (9.8% vs. 8.5%). The new index reduces exposure to Roche which accounts for 8.2% in the old index and a weight of 4.5% in the new index. The fund has €860m AUM and also comes with an expense ratio of 0.30%.

The iShares MSCI Japan SRI UCITS ETF (SUJP LN) tracks the MSCI Japan SRI Select Reduced Fossil Fuel Index. The new index consists of 65 constituents (vs. 61 in the previous index). The largest sector exposures are industrials (22.2% vs. 16.3%), consumer discretionary (14.6% vs. 24.4%), information technology (13.3% vs. 13.4%), financials (11.5% vs. 3.0%), and health care (10.3% vs. 6.0%). The new index reduces exposure to Sony which accounts for a 9.2% weight in the old index and a weight of 4.4% in the new index. Interestingly, the new index is considered higher risk than its predecessor as judged by a Synthetic Risk Reward Indicator (SRRI) of six compared to five for the old index. The fund has $210m AUM and also comes with an expense ratio of 0.30%.

The iShares MSCI EM SRI UCITS ETF (SUSM) tracks the MSCI EM SRI Select Reduced Fossil Fuel Index. The new index consists of 155 constituents (vs. 190 in the previous index). The largest country exposures are India (16.5% vs. 14.2%), South Korea (12.8% vs. 11.4%), Taiwan (12.6% vs. 27.0%), Brazil (11.8% vs. 9.8%), and South Africa (11.4% vs. 8.8%). The largest sector exposures are financials (36.0% vs. 28.2%), information technology (12.8% vs. 25.3%), communication services (12.2% vs. 8.1%), consumer staples (11.3% vs. 9.3%), and consumer discretionary (9.5% vs. 8.9%). The new index reduces exposure to Taiwan Semiconductor which accounts for a 19.7% weight in the old index and a capped weight of 5.0% in the new index. The fund has $480m AUM and comes with an expense ratio of 0.35%.