BlackRock has revealed plans to switch to an ESG index on its euro bond ETF due to “increased investor demand”.
In a shareholder letter, the asset management giant said the €1.8bn iShares € Aggregate Bond UCITS ETF (SEAG) will move from tracking the Bloomberg Euro Aggregate Bond index to the Bloomberg MSCI Euro Aggregate Sustainable and Green Bond SRI index.
As a result, the ETF will change its name iShares € Aggregate Bond ESG UCITS ETF, trade under the same ticker and will be classified as Article 8 under the Sustainable Finance Disclosure Regulation (SFDR).
BlackRock said there would be a 3bps charge to the ETF as a result of the switch but the total expense ratio (TER) would remain at 0.15%.
The letter said: “We have seen increased investor demand for evolving the existing sub-fund to adopt ESG characteristics whilst maintaining its broad market exposure.
“We believe that where enhancements can be made to improve the ESG characteristics of a portfolio while continuing to provide a similar or improved risk/return profile, such enhancements are in the best interest of investors.”
The switch will see an ESG overlay added to the index methodology tailored for the sovereign, government-related, corporate and securitised portions of its investment universe, with a minimum allocation of 10% to green bonds.
On the slightly more contentious issue of applying an ESG screen to sovereign bonds, BlackRock said it would measure each issuer’s involvement in major ESG controversies and how well they adhere to “international norms and principles”.
It added bonds not classified as green bonds must be rated BBB or higher under the MSCI rating methodology.
Furthermore, the MSCI SRI screen excludes issuers that are involved in business activities including alcohol, tobacco, gambling, adult entertainment, genetically modified organisms, nuclear power, civilian firearms and military weapons.
As a result of the switch, the number of benchmark constituents will shrink from 6401 to 5325.
Shareholders will vote on the changes at an extraordinary general meeting on 25 February with the proposed changes to take place on 18 March.
It is the latest in several index switches on the firm’s ETF range including five sector ETFs to indices that implement reduced carbon and ESG metrics.