BlackRock has launched an ETF providing climate change risk-adjusted exposure to eurozone government bonds.

Brett Olson, Head of iShares Fixed Income, EMEA, BlackRock.

The iShares € Govt Bond Climate UCITS ETF tilts towards countries that are considered to be less exposed to climate change risk and away from countries that are considered to be more exposed.

The fund has listed on Xetra and is linked to the FTSE Advanced Climate Risk-Adjusted EMU Government Bond Index. It available with distributing (SECD GY) and accumulating (SECA GY) share classes.

The underlying index FTSE Russell is based on the FTSE EMU Government Bond Index which comprises fixed-rate government bonds issued in euros by EMU countries that have at least one year until maturity, are rated investment grade by S&P and by Moody’s, and meet minimum thresholds for market accessibility and issue size.

The constituents of this parent index are weighted in relation to the market capitalisation of the country’s eligible debt. It is these weights that act as the starting point for the FTSE Advanced Climate Risk-Adjusted EMU Government Bond Index which thereupon alters the weights according to an assessment of each country’s climate risk exposure.

The exposure of each country to climate risk is measured across three distinct, quantitative climate-related pillars. These include:

(i) transition risk, which represents the effort required to reduce the country’s greenhouse gas emissions to reach the level of modelled emissions budgeted for the country in order to ensure the global average temperature does not exceed a specific level;

(ii) physical risk, which represents the level of climate-related risk exposure to the country and its economy from the physical effects of climate change (for example, sea level exposure and climate-related natural disasters); and

(iii) resilience, which represents a country’s preparedness (for example, its governmental effectiveness and its disaster preparedness) and actions taken (for example, the percentage of the country’s territory, terrestrial and marine, that is protected and the country’s afforestation rate) to cope with its level of climate-related risk exposure.

A single combined score across these three pillars is derived for each country and is used to adjust index weights. In deriving this combined score, the three pillars are given equal weight.

According to FTSE Russell, the resulting index, which has been designed in collaboration with BlackRock, is on average 26% better aligned to a 2-degree pathway and provides an average annual greenhouse gar reduction of 204 MtCO2, or 7% reduction, versus the parent FTSE EMU Government Bond Index.

The index shows some notable differences to the regular FTSE EMU Government Bond Index. Based on the FTSE Climate Risk-Adjusted EMU Government Bond Index, which is a slight variant of the FTSE Advanced Climate Risk-Adjusted EMU Government Bond Index, the biggest downgrades are Germany (coal remains the largest source of electricity in Germany) and the Netherlands, plus Spain and Ireland. Offsetting these are France (France’s energy mix is dominated by nuclear power, which accounts for around 70% of electricity production) and Italy, both of which see their weights upgraded relative to the benchmark universe. (See chart below.)

Commenting on the launch, Brett Olson, Head of iShares fixed income, EMEA, at BlackRock, said: “Sovereign issuers are facing increasing pressure to meet sustainability criteria, as more investors consider the ESG profile of their fixed income portfolios. Until today, investors have had very limited options for cost-effective exposure to government bonds that incorporate climate risk. This launch is yet another example of our commitment to providing investors with more choice to build sustainable portfolios.”

Arne Staal, Global Head of Research and Product Management, FTSE Russell, added: “The decision by a leading investor and ETF provider such as Blackrock to license FTSE Russell’s Advanced Climate EGBI for an ETF listing marks an important juncture in climate-themed investing in European fixed income markets. Both institutional and private asset owners are increasingly including climate objectives in their decision making and are adjusting fixed income portfolios based on climate concerns. We expect growing interest from investors in this area.”

The fund is constructed using an optimised, physical replication approach and comes with an OCF of 0.09%. It has been seeded with $5 million.

(Source: FTSE Russell as of July 31, 2020. Data relates to FTSE Climate Risk-Adjusted EMU Government Bond Index.)