Industry Updates

BlackRock proposes ESG index switch on quality factor range

$1.2bn small cap ETF is also in line for an ESG index switch

Theo Andrew

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BlackRock is proposing to switch to an ESG-focused index on three quality factor ETFs as well as a US-equity small cap ETF.

In a shareholder notice, Europe’s largest asset manager proposed the switch on the $654m iShares MSCI World Quality Dividend UCITS ETF (WQDV), the $198m iShares MSCI Europe Quality Dividend UCITS ETF (EQDS) and the $428m iShares MSCI USA Quality Dividend UCITS ETF (QDIV).

Furthermore, Blackrock proposed to switch the index on the $1.2bn iShares MSCI USA Small Cap UCITS ETF (CUSS) from the MSCI USA Small Cap index to the MSCI USA Small Cap ESG Enhanced Focus CTB index.

WQDV will go from tracking the MSCI World High Dividend Yield index to the MSCI World High Dividend Yield ESG Reduced Carbon Target Select index while EQDS will switch from the MSCI Europe High Dividend Yield 4% Issuer Capped index to the MSCI Europe High Dividend Yield ESG Reduced Carbon Target Select index.

Meanwhile, QDIV will change from tracking the MSCI USA High Dividend Yield index to the MSCI USA High Dividend Yield ESG Reduced Carbon Target Select index which will see the number of constituents halved from 155 to 88.

BlackRock’s WQDV will also see a significant reduction in its holdings, falling from 327 to 176 while EQDS will see its constituents increase from 56 to 62.

Costs for switching the ETFs – which will be borne by the fund – range from 17bps for the EQDS to 3bps for CUSS.

BlackRock said: “We have seen increased shareholder demand for evolving the existing sub-fund to adopt ESG characteristics whilst maintaining its factor exposure.

“We believe that where enhancements can be made to improve the ESG characteristics of the sub-fund’s portfolio while continuing to provide a similar or improved risk/return profile, such enhancements are in the best interest of shareholders.”

It added it will continue to maximise the exposure to the dividend yield factor while reducing the carbon intensity and potential emissions of the strategies.

The new indices will exclude issuers involved in certain business lines including alcohol, tobacco, gambling, adult entertainment, genetically modified organisms, nuclear power, civilian firearms, conventional, nuclear and controversial weapons, thermal coal and fossil fuels.

Issuers with a ‘red’ MSCI controversy score will also be removed from the indices.

Following the switches, the ETFs will have ESG added to their names – while remaining under the same tickers. CUSS will be labelled Article 9 under the Sustainable Finance Disclosure Regulations (SFDR), while the three quality factor ETFs will be labelled Article 8.

Shareholders have been asked to vote on the changes in an extraordinary general meeting on 29 April, with the changes earmarked for 1 June.

BlackRock has shifted several ETFs to ESG indices of late as it is seen as a more efficient way of meeting client demand than launching ESG ETFs from scratch.

However, the world’s largest asset manager has failed to get shareholder approval for the switches on three ETFs including the €1.4bn  iShares € Corp Bond ex-Financials UCITS ETF (EEXF) due to an administrative error regarding the delivery of voting forms, according to the asset manager.

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