BlackRock has expanded its European suite of sustainable fixed income solutions with the launch of two climate-aligned ETFs.
Brett Olson, Head of Fixed Income iShares in EMEA at BlackRock.
The iShares € Green Bond UCITS ETF (GRON GY) has listed on Deutsche Börse in euros and provides exposure to euro-denominated green bonds that have been issued specifically to fund environmental projects.
The iShares Global Govt Bond Climate UCITS ETF (CGGD NA) has listed on Euronext Amsterdam in US dollars and tracks a portfolio of global government bonds while tilting to countries that are less exposed to climate change risks.
Brett Olson, Head of Fixed Income iShares in EMEA at BlackRock, said: “We are committed to helping investors build sustainable portfolios that align with their specific goals. The AUM of our iShares EMEA fixed income range has grown by around 29% in the past year, as investors are increasingly using them as transparent, efficient building blocks to access the bond market sustainably.”
Green bonds
The iShares € Green Bond UCITS ETF is referenced to the Bloomberg Barclays MSCI Euro Green Bond SRI including Nuclear Power Index and is BlackRock’s first dedicated green bond ETF.
The index measures the performance of euro-denominated, fixed-rate, investment-grade bonds that have been independently evaluated and designated ‘green’ by MSCI ESG Research. MSCI’s green certification framework ensures that proceeds are only used for climate-enhancing projects (such as for renewable energy, green buildings, wastewater management, energy efficiency, and public transport) and that ongoing transparency and reporting requirements are met.
Government, supranational, corporate, and securitized bonds are all eligible for inclusion as long as they have a minimum amount outstanding of €300 million. There is no minimum remaining time until maturity requirement and, as such, all bonds are held until they expire.
The index screens out issuers involved in certain business activities such as controversial and nuclear weapons as well as those associated with major ESG controversies.
Constituents are weighted by market capitalization while capping any government or supranational issuer at 19.5% and any corporate issuer of 4.5%. The index rebalances on a monthly basis.
The fund comes with an expense ratio of 0.20%. Distributions are made on a semi-annual basis.
The market for green bond ETFs has become increasingly competitive in Europe with Lyxor, UniCredit, LGIM, and Franklin Templeton all offering products in this space. BlackRock’s fund is the cheapest with the others costing between 0.25% and 0.35%. The largest fund, by far, is the €570m Lyxor Green Bond UCITS ETF (CLIM LN) which tracks the Solactive Green Bond EUR USD IG Index.
Global government
The iShares Global Govt Bond Climate UCITS ETF meanwhile tracks the FTSE Advanced Climate Risk Adjusted World Government Bond Index, which in turn is derived from the FTSE World Government Bond Index (WGBI) universe, a representation of investment-grade sovereign bonds from 22 developed economies.
The index methodology incorporates a forward-looking assessment of sovereign climate risks using analysis from ESG analytics firm Beyond Ratings with each country assessed by three core climate risk pillars: transition risk, physical risk, and resilience.
Transition risk represents the impact on the country and its economy from the required efforts to meet the Paris Accord 2.0°Celsius target, measured on 15 variables including GDP per capita, the energy intensity of GDP, and carbon intensity of energy production.
Physical risk refers to the climate-related risk to the country and its economy from the physical effects of climate change including sea-level rise, exposure of the economy to potential agricultural damages, and climate-related natural disasters such as extreme weather.
Resilience indicates a country’s preparedness and actions to cope with climate change, measured by the strength of a nation’s institutions and its level of social and economic development.
Countries are scored across each of the pillars and a single combined score is arrived at for each country. Country scores are then used to reweight the country’s exposure in the index to provide higher exposures to countries that are better prepared for climate change risks. Similarly, the methodology lowers exposure to countries that are more threatened by climate change risks.
Country climate scores are calculated annually in April with the index also maintaining the standard rebalancing processes of the WGBI.
The countries that have experienced the largest reduction in weight compared to the regular WGBI are the US (-4.3%), The Netherlands (-1.2%), Belgium (-1.0%), Canada (-0.6%), and Australia (-0.5%). Conversely, the countries benefitting from greater exposure are the UK (3.0%), Germany (2.3%), Italy (1.4%), Austria (0.6%), and Spain (0.6%).
The credit rating profile of the climate risk index is broadly similar to the WGBI, though it has a slightly lower yield-to-maturity of 0.47% (vs. 0.52% for the parent index) and a slightly higher duration of 8.98 years (vs. 8.77 years). All index data as of the end of February 2021.
The ETF also comes with an expense ratio of 0.20% and makes distributions on a semi-annual basis.
The fund is the first climate risk-adjusted government bond ETF with a global mandate, although BlackRock and Ossiam offer similar products targeting eurozone government bond issuers. The iShares € Govt Bond Climate UCITS ETF (SECD GY), launched in October 2020, has assets of €80m and comes with an expense ratio of 0.09%, while the Ossiam Euro Government Bonds 3-5Y Carbon Reduction UCITS ETF (OG35 GY), launched in June 2020, houses €230m and costs 0.17%.