BlackRock unveiled a five-strong range of climate transition ETFs last month expanding its extensive sustainable ETF range with a lighter ESG touch.
With total expense ratios (TERs) ranging from 0.07% for the US exposure to 0.15% for Japan, the suite aims to ‘provide access to companies leading in the transition to a low carbon economy’.
The ETFs:
iShares MSCI World Climate Transition Aware UCITS ETF (WCTA)
iShares MSCI Europe Climate Transition Aware UCITS ETF (ECTA)
iShares MSCI Japan Climate Transition Aware UCITS ETF (JCTA)
The ETFs – labelled Article 8 under the Sustainable Finance Disclosure Regulation (SFDR) – track the respective regions of the MSCI Transition Aware Select index suite.
Companies included in the index must either meet ‘science-based’ targets, derive 20% or more of their revenues from green revenues or have published emissions reduction targets.
Demand for ETFs that seek to benefit from the transition to a low-carbon economy is on the rise.
BlackRock launched the product suite in response to strong institutional demand in northern Europe, particularly the Nordics.
A 2023 survey found 65% of Nordic institutional investors plan to increase transition allocations in the next one to three years.
While the suite might have useful benefits within investors' portfolios, others will question whether the sort of companies selected in the index will truly be affecting the transition.
A ‘tick box’ exercise?
Patrick Thomas, head of ESG portfolio management at Canaccord Genuity Wealth Management, said the range is suited to institutional investors who are increasingly mandated to consider sustainable targets in their portfolios.
“It is performing a role for people who want to be sustainable but want returns that are very closely aligned to what the market is doing,” he said.
He added investors may be willing to pay extra fees – despite the ETF range performing similarly to conventional indices – due to the ESG tilting the ETFs give portfolios.
For example, UCTA holds all of the ‘magnificent seven’ stocks, while the WCTA very closely mirrors both the sectoral and geographical exposures of the MSCI World index.
“You can be pretty sure if Nvidia has a bumper day you are going to benefit from that,” Thomas added. “If you have got an index that looks and feels like a conventional index, effectively it could perform the same role that an MSCI World index.”
As a result, he said the range could be more of a "tick box exercise" as the index constituents will not significantly impact the climate issue. He noted 54% of the net asset value is in healthcare and financials, sectors that are not major emitters.
"This index has almost no exposure to utilities, which are crucial for the transition, and very little exposure to materials and industrials," Thomas said. "Investors should have exposure to the harder-to-decarbonise areas of the economy."
PAB compliment
While transition ETFs have piqued the interests of local authority pension funds and defined contribution pension plans due to their long-term strategies, James Peel, portfolio manager at Titan Asset Management sees additional benefits.
He said the rage could serve as a useful complement to Climate Transition Benchmark (CTB) and Paris-Aligned Benchmark (PAB) strategies, effectively avoiding some of the latter's pitfalls.
Peel said while CTB and PAB methodologies are useful they place a heavier burden on emerging markets compared to developed ones, which conflicts with the Paris Agreement’s principle of 'common but differentiated responsibilities’.
“Products with a more holistic approach to the energy transition, like BlackRock’s new suite of ETFs, should prove a useful complement to PAB/CTB methodologies,” he said.
“BlackRock’s suite takes a sector-neutral approach, which might also help from a portfolio construction perspective for sustainability-minded investors.”
Thomas noted, “If you've got an index that looks and feels like a conventional index, effectively it could perform the same role that an MSCI World Index might perform”.
Additionally, climate transition awareness ETFs are gaining interest among local authority pension funds and defined contribution pension plans - managing long-term assets - making these products well suited to their portfolios.
SDR confusion
The range has also sparked a debate on where transition products will sit under the Financial Conduct Authority’s (FCA) incoming Sustainable Disclosure Regulation (SDR).
Domiciled in Ireland, the ETFs themselves will not initially be in scope under SDR but could help potentially be used in a portfolio of funds that is.
Highlighting the confusion around the rules, investors are divided about which SDR label could be applied to the ETFs.
Of the four categories - ‘Improvers’, ‘Focus’, ‘Impact’ and ‘Sustainability Mixed Goals’ Peel said the ETF range sits under the ‘Improvers’ label.
Conversely, Patrick Thomas, head of ESG portfolio management at Canaccord Genuity Wealth Management noted the range sits in the ‘Focus’ category.
The ‘Focus’ category is a label for funds that are leaders in their particular sector around sustainability.
“If I look at what its biggest holdings are, they are leaders rather than improvers to me,” Thomas said.
“They are not massive emitters relative to other companies. I do not think they sit in the improvers category.”
