iShares MSCI Emerg Mkts Min Vol Fctr ETF EEMV Sustainability

iShares MSCI Emerg Mkts Min Vol Fctr ETF has a number of attributes that may meet the expectations of sustainability-focused investors, despite some issues worthy of attention.

The ESG risk of iShares MSCI Emerg Mkts Min Vol Fctr ETF's holdings is comparable to its peers in the Global Emerging Markets Equity category, thus earning an average Morningstar Sustainability Rating of 3 globes. Funds in the same category rated 4 or 5 globes tend to hold securities less exposed to ESG risk. Unlike impact, which measures positive environmental and societal outcomes attributable to an investment, ESG risk reflects the degree to which investments could be affected by material ESG issues like climate change and inequalities.

The fund's current involvement in fossil fuels rests at 3.73%, which compares favorably with 7.58% for its average category peer. Companies are considered involved in fossil fuels if they derive some revenue from thermal coal, oil, and gas. The fund exhibits negligible exposure (1.80%) to companies with high or severe controversies. From bribery and corruption to workplace discrimination and environmental incidents, controversies can have significant financial repercussions, ranging from legal penalties to consumer boycotts. In addition, controversies can damage the reputation of both companies themselves and their shareholders.

One potential issue for a sustainability-focused investor is that iShares MSCI Emerg Mkts Min Vol Fctr ETF doesn’t have an ESG-focused mandate. Funds with an ESG-focused mandate would have a higher probability to drive positive ESG outcomes.

iShares MSCI Emerg Mkts Min Vol Fctr ETF has an asset-weighted Carbon Risk Score of 10.79. This is situated at the lower end of the medium carbon risk band, suggesting that its current equity and/or bond holdings are moderately positioned to transition to a low-carbon economy. Investors concerned about the transition risks may prefer to consider funds with negligible or low carbon risk. Funds with a lower carbon risk classification may be more favored by investors concerned about transition risks, as such funds often tilt toward companies that operate in sectors less exposed to the transition (for example, healthcare and IT) or companies in more carbon-intensive sectors (for example, materials and utilities) that consider climate change in their business strategy, and therefore are positively aligned with the transition.

BlackRock’s efforts to build out topnotch resources and integrate ESG considerations in most parts of its business is impressive, but its sheer size and asset mix hamper its ability to fully embrace a culture of sustainable investing. The firm earns a Morningstar ESG Commitment Level of Basic. In January 2020, CEO Larry Fink made a high-profile declaration that sustainability would become BlackRock’s standard for investing, and this kick-started the firm’s ESG efforts. Since then, the firm has ramped up its integration of ESG criteria to include nearly all actively managed strategies (roughly one third of the firm’s assets) and rolled out fund-level ESG disclosures for all funds. BlackRock has also rolled out dozens of ESG-focused product offerings in recent years. However, both in terms of assets and volume, strategies that cater to sustainability-focused investors continue to be dwarfed by those that don’t (accounting for 4% versus 60% of assets, respectively). Despite being the world’s largest asset manager, BlackRock’s ability to push for improvement on ESG issues at investee companies seems limited. Fear of accusations of anticompetitive behavior means the firm is reluctant to file or co-file shareholder resolutions or join onto collaborative engagements. More recently, BlackRock has found itself at the center of anti-ESG sentiment in the United States, making the manager hesitant to promote a strong sustainability agenda, as evidenced by its latest voting record. BlackRock backed only half of key ESG resolutions in 2022, down from 72% in 2021, although still up from 16% in 2020. On climate-specific proposals, BlackRock’s support also waned in 2022, judging them too prescriptive. But changes are afoot to give shareholders a bigger voice in the conversation. In 2021, BlackRock rolled out a pass-through proxy-voting program it calls “Voting Choice,” which allows clients to choose a proxy-voting policy that reflects their individual priorities, effectively empowering investors to vote their own proxies. This option is not yet available to all shareholders, but it is a suitable workaround for those clients who can leverage it. BlackRock’s size gives it an edge over peers, particularly in its ability to process massive volumes of ESG data and translate it into meaningful investment insights. Still, the firm restructured its central sustainable-investing team in October 2022. Some functions, including sustainability research and ESG monitoring, moved into the broader BlackRock Investment Institute, and other functions such as client engagement remain in the renamed Sustainable Transition Solutions unit. The reorganization makes sense in principle, but it will take time for the team to harness new synergies and settle into new roles. The group hasn’t been immune to turnover either. Roughly 30 sustainability-focused professionals (of a team of 70) left the firm since the beginning of 2019, although their roles were quickly backfilled. When it comes to driving outcomes for sustainability-focused investors, BlackRock’s size is in many ways its biggest strength and its biggest weakness, but bright spots remain.