BlackRock has launched a range of UK-domiciled sustainable iShares index mutual funds, and the firm writes that this is to address the gap in the UK wealth market for strategies that help clients make a sustainable transition with indexing.
The range comprises five funds covering regional and country-specific equity exposures which are designed to maximise ESG characteristics and reduce carbon emissions intensity by at least 30 per cent while remaining close to the parent benchmark.
The UK is entering a period of accelerated growth for indexing across wealth portfolios. BlackRock expects current levels of 10-20 per cent within the portfolios of financial advisers, traditional and digital wealth managers and private banks to double over the next three years.
The firm writes that index mutual funds continue to play an important role in this market, reflecting strong client interest for strategies that allow them to build low-cost, efficient portfolios and gain exposures to desired investment outcomes.
This growth is driven by the centralisation of investment decisions by UK wealth manager head offices adopting discretionary portfolio management for a greater proportion of client assets. Alongside this trend, there is widespread and growing appetite from investors to embed sustainability into their asset allocation decisions.
Manuela Sperandeo, BlackRock’s EMEA Head of Sustainable Indexing, says: “We are excited to launch this new range of funds which set the standard for sustainable index investing in the UK market. Investors across the country, including pension funds, wealth managers and private banks, are turning to solutions that enable them to incorporate ESG considerations into their standard portfolios. These new sustainable, core index building blocks allow investors to build low-cost, global equity portfolios with the flexibility to adjust exposures according to their asset allocation needs.”
For the first time, BlackRock has worked with Morningstar Indexes, one of the fastest growing global index providers, to design a set of ESG equity indexes covering global, regional and country-specific exposures. Each index has been designed to maintain a target tracking error, assigned for each geography, which reflects UK investor preferences to closely match the performance of the parent broad market indexes.
The Morningstar ESG Enhanced Index methodology applies a set of 10 exclusionary screens to limit each fund’s exposure to controversial activities. In addition to BlackRock’s baseline screens, a set of screens specific to the UK market has been incorporated that relate to Alcohol, Gambling and Adult Entertainment. Lastly, companies with a severe controversy score, as defined by Sustainalytics, the ESG data provider which is also part of Morningstar, are excluded as well as those with a missing ESG risk rating or controversy score.
The securities are then re-weighted with the goal of optimising for ESG characteristics while maintaining the risk profile of the parent universe. Moreover, the indices have an explicit decarbonisation target, to respond to the increasing demand from UK investors for climate aware investment products.
Rob Edwards, Director of Product Management, EMEA & ESG, Morningstar Indexes, says: “We are thrilled to build on our global collaboration with BlackRock to offer differentiated index-based strategies to help European investors address their growing sustainable investment needs. Our suite of ESG indexes draw on the capabilities of Morningstar Indexes global research team in addition to the underlying ESG ratings of highly respected ESG ratings provider Sustainalytics, also part of Morningstar. In combination with the strength of BlackRock, our indexes represent compelling value for the end investor.”