BlackRock’s iShares and State Street Global Advisors are expanding their ESG ETF offerings.
Later this year, iShares plans to introduce three ETFs that exclude fossil fuels as part of its “Advanced” product line for index-based ETFs that also screens out for-profit prisons, controversial weapons manufacturers, palm oil producers and companies with high controversy scores.
On March 4, iShares will be rebranding its Sustainable Core ETFs as “aware” funds, which include only companies with favorable environmental, social and governance characteristics but offer a similar risk and return profile to broad market indexes.
The Aware product line was originally introduced in March 2018 with several equity and fixed income ESG ETFs based on indexes from MSCI, which is also the index provider for the Advanced product line. In a few weeks, those indexes for the Aware-branded ETFs will add screens that exclude companies collecting revenues from thermal coal and oil sands.
There’s been a “growing demand for iShares sustainable ETFs and the need to offer greater choice to make sustainability our standard for investing,” said Armando Senra, head of Americas iShares.
One sign of that growing demand: a recent $600 million investment from Ilmarinen, Finland’s largest pension insurance company, in iShares ESG MSCI EM Leaders ETF (LDEM), which is a sustainable emerging markets ETF. Ilmarinen had previously helped iShares launch its ESG MSCI USA Leaders ETF (SUSL) in May, with an $850 million investment.
State Street, which has several index ESG ETFs, has filed an application with the Securities and Exchange Commission to trade its first actively managed ESG ETF.
The SPDR SSGA Responsible Reserves ESG ETF will invest in short-term fixed income securities including Treasuries, mortgage pass-throughs and corporate bonds and screen out most issuers that are involved in or derive revenue from extreme event controversies, controversial weapons, civilian firearms, thermal coal extraction, tobacco and UN Global Compact (sustainability principles) violations.
Issuers in the financial services sector are excluded from this initial screening process but could be screened out under other ESG criteria.
Both BlackRock and State Street are among a growing number of asset managers that are promoting the use of ESG ratings in their investment products and analyses along with some exclusionary sustainability screens. Both have CEOs who have warned corporate executives that failure to disclose and address material issues involving environmental, social and governance factors could result in their proxy votes against management.
“We will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them,” wrote BlackRock CEO Larry Fink in his January letter to CEOs.
Cyrus Taraporevala, president and CEO of State Street Global Advisors, was even more threatening in his January letter to corporate board members: “Beginning this proxy season, we will take appropriate voting action against board members at companies in the S&P 500, FTSE 350, ASX 100, TOPIX 100, DAX 30 and CAC 40 indices that are laggards based on their R-Factor scores and that cannot articulate how they plan to improve their score.”
State Street’s R-factor (the R stands for responsibility) is a proprietary rating system that measures the performance of a company’s business operations and governance in terms of any financially material and sector-specific ESG issues.
Despite these pronouncements, neither BlackRock nor State Street place among the top 10 fund managers supporting ESG-related proxy resolutions last year or over the past five years, according to Morningstar. BlackRock was among the least supportive in 2019, favoring just 7% of ESG-related shareholder resolutions in 2019, tying with Vanguard. Fifteen of 23 ESG resolutions that achieved 40%-50% support would have passed if BlackRock had supported them, according to Morningstar.
— Check out Opposition to SEC Proxy Proposals Grows on ThinkAdvisor.