BlackRock has launched a new ETF in the US providing broad exposure to the US equity market while adhering to the carbon reduction objectives set forth in the Paris Agreement.
The Paris Agreement seeks to limit global warming to 1.5°C by 2050.
The iShares Paris-Aligned Climate MSCI USA ETF (PABU US) has been listed on Nasdaq.
The fund is linked to the MSCI USA Climate Paris Aligned Benchmark Extended Select Index which is based on the parent MSCI USA Index, a broad market benchmark capturing the performance of large and mid-cap equities and covering approximately 85% of the float-adjusted market capitalization in the US.
Companies embroiled in severe ESG-related controversies as well as firms with business operations linked to weapons, tobacco, thermal coal, oil & gas, and oil sands are excluded.
MSCI’s Climate Paris Aligned methodology then reweights remaining securities based on the risks and opportunities associated with the climate transition while also seeking to minimize exclusions from the parent index.
MSCI harnesses a diverse range of data and analytical tools to aid in index construction. This includes scope 1, 2, and 3 carbon emissions, green revenues, and the index provider’s own proprietary low carbon transition score and climate value-at-risk measures.
The index offers an immediate 50% reduction in weighted average carbon intensity as well as a further 10% annual decarbonization going forward. These conditions satisfy the European Union’s Paris-aligned Benchmark (PAB) requirement, aligning the strategy with a trajectory to limit global warming to 1.5°C by 2050.
In addition to the above primary objectives, the index aims to achieve secondary objectives such as maximizing exposure to sustainable energy providers, increasing the weight of companies with clear carbon reduction targets, minimizing fossil fuel exposure, reducing climate value-at-risk by 50%, and maintaining a modest tracking error relative to the parent index.
As of the end of January 2022, the index contained 319 constituents compared to 628 for the MSCI USA. There was notably higher weight in information technology stocks at 37.2% (vs. 29.4%) while the next-largest sector exposures were broadly in line with the parent universe – consumer discretionary (12.5%), health care (12.1%), financials (10.6%), and communication services (8.5%).
The largest stocks echoed those in the parent index albeit with slightly higher weights. They were Apple (8.0%), Microsoft (6.4%), Amazon (3.4%), Tesla (2.8%), Alphabet C (2.3%), Meta Platforms A (2.0%), and Nvidia (1.9%).
The ETF comes with a net expense ratio of 0.10% due to a contractual fee waiver in place until at least February 2023. Its gross expense ratio is 0.15%.
The fund is the second ETF in the US to explicitly follow a Paris-Aligned investment mandate following the December 2021 launch of the Goldman Sachs ActiveBeta Paris-Aligned Climate US Large Cap Equity ETF (GPAL US). GPAL covers the US large-cap equity market while combining Goldman Sachs’ proprietary ‘ActiveBeta’ multi-factor investment approach with adherence to the carbon reduction goals of the Paris Agreement. Its expense ratio is 0.20%.