Highlights

• BlackRock eases nuclear and firearm exclusions on $64bn of ESG funds following MSCI index methodology updates.
• The iShares MSCI ESG Enhanced CTB and Aquila Life funds will align closer with non-ESG benchmarks to reduce tracking error.
• Adjustments retain SFDR Article 8 classification, using new data on greenhouse gas emissions for improved sustainability metrics.

BlackRock, the world’s largest asset manager, is adjusting its sustainable investment strategy by easing restrictions on certain weapons-related exclusions in ESG funds valued at about $64 billion.

The company’s decision comes after updates in MSCI index methodologies and investor feedback indicating a preference for indices with lower tracking error compared to standard market benchmarks.

These changes will impact major fund ranges such as the iShares MSCI ESG Enhanced CTB Ucits ETF and Aquila Life funds, together worth $55.5 billion, as well as the $8.5 billion BlackRock systematic equity fund range.

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The update narrows the scope of exclusions on nuclear weapons and civilian firearms.

For nuclear weapons, exclusions will stay for companies directly engaged in core weapons manufacturing, but will be lifted for firms that supply dual-use components or support services.

In the case of civilian firearms, the new screening will restrict producers of automatic and semi-automatic weapons and small arms ammunition, dropping broader limitations on other sector-related firms. This adjustment aligns the funds more closely with non-ESG market indices, thereby enabling performance comparisons with mainstream benchmarks.

All affected funds will keep their SFDR Article 8 classification under the European Union’s sustainability framework. BlackRock mentioned that these updates are unlikely to alter risk or return profiles. The changes arrive as many investors revisit defence stocks’ ESG credentials in light of increasing defence spending in Europe, which prompts asset managers to reconsider strict exclusionary criteria.

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The iShares ESG Enhanced ETF range, which includes major strategies such as the iShares MSCI World ESG Enhanced Ucits ETF and iShares MSCI EM ESG Enhanced CTB Ucits ETF, will follow revised MSCI benchmark methodologies.

MSCI’s recent consultation on its ESG Enhanced and Climate Transition Benchmarks (CTB) aims to adjust screening criteria and reduce tracking error, which aligns ESG indices closer to regular benchmarks. These updates will take effect from late 2025.

Also, the new index versions will use improved data quality to calculate greenhouse gas emissions intensity, which makes sustainability assessments within the funds more accurate.

So, overall, BlackRock’s ESG fund adjustments put across a strategic recalibration of sustainable investment rules, balancing ethical screening with market performance consistency. The changes tie in with broader trends in ESG investing, where asset managers reassess exclusion policies in response to market realities, index reforms, and client preferences.

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Source: Citywire