iShares ESG Aware MSCI EAFE ETF has an average Morningstar Sustainability Rating of 3 globes, indicating that the ESG risk of holdings in its portfolio is similar to that of its peers in the Global Equity Large Cap category. Funds with 4 or 5 globes tend to hold securities that are less exposed to ESG risk. ESG risk measures the degree to which material environmental, social, and governance issues, such as climate change, biodiversity, human capital, as well as bribery and corruption, could affect valuations. ESG risk differs from impact, which is about driving positive environmental and social outcomes for society’s benefit.
Based on its latest prospectus, sustainability or ESG factors are a focus in the investment process of iShares ESG Aware MSCI EAFE ETF. Funds with ESG-focused mandates are more likely to deliver positive sustainability outcomes. iShares ESG Aware MSCI EAFE ETF has an asset-weighted Carbon Risk Score of 7.6, indicating that its companies have low exposure to carbon-related risks. These are risks associated with the transition to a low-carbon economy such as increased regulation, changing consumer preferences, technological advancements, and stranded assets.
By prospectus, the fund aims to avoid, or limit its exposure to, companies associated with controversial weapons, tobacco, thermal coal, and and small arms. Yet this goal is far from achieved, as the fund exhibits 1.71% and 0.98% exposure to controversial weapons and small arms, respectively. This compares with 1.27% and 1.01% for its average peer in the Global Equity Large Cap category.
Currently, the fund has 10.0% involvement in fossil fuels, which is roughly in line with 10.6% 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's 9.7% involvement in carbon solutions is roughly in line with the 8.7% average involvement of its peers in the Foreign Large Blend category. Carbon solutions include products and services related to renewable energy, energy efficiency, green buildings, green transportation, and so on. The fund has a modest level of exposure (4.45%) to companies with high or severe controversies. Companies with controversies are involved in incidents such as corruption, employee abuses, and that pose some degree of business risks to the company. Severe and high controversies can have significant financial repercussions, ranging from legal penalties to consumer boycotts. In addition, they controversies can damage the reputation of both companies themselves and their shareholders.