iShares Debuts Paris-Aligned ESG ETF

iShares’ latest ETF aims to give investors access to an index aligned with the decarbonization targets of the 2015 Paris Climate Accords, the second such product in the U.S.

The iShares Paris-Aligned Climate MSCI USA ETF (PABU) debuted on the Nasdaq on Thursday with an initial expense ratio of 0.10%. A waiver of 5 basis points expires at the end of February 2023.

PABU follows the MSCI USA Climate Paris Aligned Benchmark Extended Select Index, a narrowed version of the MSCI USA Index that seeks to have half of the emissions across all three scopes to its parent index, and a 10% annual reduction in emission intensity compared to the MSCI USA Index. The fund weights its constituents based on a set of sustainability rankings rather than by market capitalization.

Those targets align with the European Union’s 2019 edict on ESG indexes.

The fund also screens out several industries usually not included in ESG investment vehicles, including tobacco, weapons manufacturing, fossil-fuels producers and energy generator companies. That leaves the index with 319 constituents compared to the 628 in its parent.

PABU has two sister funds trading on the Euronext Amsterdam: the iShares MSCI Wld Paris-Aligned Climate UCITS ETF (WPAD) and the iShares MSCI Europe Paris AGND CLM ETF (EPAD). The two funds launched last spring but have not garnered significant interest, with just $3.8 million in assets under management combined, according to data from ETFLogic.

PABU’s top 10 holdings on launch share seven companies with the top 10 in the S&P 500: Apple, Microsoft, Alphabet, Meta Platforms, Nvidia, Tesla and Amazon. That weight in software companies combined with a blanket ban on oil and gas companies means the index is starting with an already minimal carbon intensity compared to the universe of mid and large cap companies that PABU benchmarks its climate intensity against.

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

Lukas Smart, head of iShares’ sustainable and factor products, said PABU is trying to balance replicating the performance of the broader market against its carbon-reduction goals.

“We want to deliver [this fund] for investors that can use it at the core of their portfolio, and because of that specific use case with investors, you can't create a product that's going to deviate very significantly from the market,” he said.

The only other ETF in the U.S. that claims to be compliant with the EU naming designation is the Goldman Sachs ActiveBeta Paris-Aligned US Large Cap Equity ETF (GPAL). That fund passively follows an EU Paris Benchmark-compliant index, but weights its stocks by four factors rather than a company’s carbon intensity.

Contact Dan Mika at [email protected], and follow him on Twitter