• With an initial AUM of US$426 million (S$580 million), the iShares MSCI Asia ex Japan Climate Action ETF commenced trading today, marking the largest equities ETF at launch on SGX with Prudential as its key anchor investor. This takes the total AUM of all SGX-listed ETFS to above S$11 billion.
   
• As ESG factors continue to drive financial decisions globally, this ETF that tracks Asian companies’ green transition provides an opportunity to invest in sustainability with a focus on climate action with one of the lowest annual management fees among major Asia ex-Japan ETFs – an all-inclusive and transparent fee of 0.18% of Net Asset Value.
   
• The iShares MSCI Asia ex-Japan Climate Action ETF offers investors access to companies that are deemed to be better positioned for the transition to a low-carbon economy. The top 10 constituents on its underlying index, the MSCI Asia Ex-Japan Climate Action index, include TSMC, Alibaba, Tencent, Tencent, Reliance and DBS – representing 28% of its 605 constituents in markets across Singapore, China, India, Taiwan, South Korea, and Hong Kong.
   

The Case for Investing in Net-Zero

While outlooks have anchored to global economic slowdown, considerations of environmental, social and governance (ESG) factors have continued to drive investment decisions worldwide.

The green energy transition remains a key focus, especially after Russia’s invasion of Ukraine highlighted the world’s dependency on fossil fuel, amplifying calls for an accelerated energy transition.

The momentum for “green investment” – supporting business practices with a favorable impact on the environment – has seen a boost this year. The International Energy Agency predicts out of the roughly $2.8 trillion USD estimated to be invested in energy in 2023, more than $1.7 trillion USD will go into clean energy [1], including renewable power, nuclear grids, storage, low-emission fuels, efficiency improvements and end-use renewables and electrification.

Asset owners are also using index solutions to meet their climate objectives. According to the MSCI Net Zero Asset Owner Guide [2], asset owners following a rules-based investing strategy can leverage stewardship and reorient their investments by choosing to use benchmarks that align with global climate goals.

The MSCI Climate Action indexes include stocks based on sector relative carbon intensity and measures taken to reduce emissions, relying on clearly defined climate indicators. It carries the goals of investing to drive decarbonization in the real economy and providing transparent paths for companies to be included in its index portfolio.
 

Transparent methodology of exclusion and selection

The iShares MSCI Asia ex Japan Climate Action ETF offers investors the ability to seek to lower emissions as part of portfolio objectives and allow for comparable performance to the parent index, all at a competitive cost – with one of the lowest annual management fees among major Asia ex-Japan ETFs – an all-inclusive and transparent fee of 0.18% of Net Asset Value [3].

The MSCI AC Asia ex Japan Climate Action Index, the ETF’s underlying index, is designed to represent the performance of companies that have been assessed to lead their sector peers in terms of their positioning and actions relative to climate transition. It provides investors the access to the best-in-class companies that are committed to reducing carbon emissions – as the index balances companies’ transition risks against their emission reduction targets and climate risk management to select the top 50% of companies in each GICS sector.

Issuers from the underlying MSCI AC Asia ex Japan Index are excluded based on MSCI’s exclusionary criteria, which involves screening on ESG controversies, ESG business involvement, emission intensity, and climate risk management.

• MSCI ESG Business Involvement Screening Research and MSCI Climate Change Metrics are used to identify companies that are involved in the following business activities such as controversial weapons, tobacco, thermal coal mining, oil sands and nuclear weapons.
   
• The remaining constituents are then assessed relative to their sector peers based on their emissions intensity, emissions reduction commitments, climate risk management and revenue from greener businesses.
   
• •Overall, the Index targets a coverage of 50% of the companies per sector from the Parent Index. The Parent Index weights of the remaining selected securities are renormalized to 100%. Sector weights are limited to +/- 5% the weight of that sector in the Parent Index, and individual issuer weights are capped at 5% of the Index.
   

Indicators that MSCI looks at to assess companies’ climate transition risk and mitigation plans include questions such as: Does the company have Science-Based Targets initiative (SBTi)-approved targets or a credible track record? Is the company active in green product or services? How is the company managing climate risks?

There are also cross-trading opportunities with SGX MSCI Asia Ex-Japan Climate Action Index Futures launched in June 2023. This is the first global suite of futures contracts tracking MSCI Climate Action Indexes Net USD (World, Europe, USA, Japan and Asia Ex-Japan) and currently has open Interest of US$17 million for SGX MSCI Asia Ex-Japan Climate Action Index Futures and US$27 million for SGX MSCI World Climate Action Index Futures.
 

Higher weightage in Top Constituents

Nine out of 10 of the underlying index’s top constituents also carry increased weights in the Climate Action index. As tabled below, Chinese technology giants such as Alibaba Group Holdings has a weightage of 3.31% in the MSCI AC Asia ex Japan index – and carry an increased weightage of 5.41% in the ETF’s underlying Climate Action index.

Alibaba for instance pledged in its 2023 ESG Report [4] that achieving carbon neutrality in combating climate change challenges is among the company’s top ESG topics. Since announcing its commitment to carbon neutrality in 2021, the company’s Task Force on Climate-related Financial Disclosures framework helps strengthen its participation in global actions to tackle climate challenge – to actively identify, assess and manage climate-related risks and opportunities as well as integrate climate risks into its enterprise risk management system through forward-looking climate scenario analysis.

Singapore-listed DBS Group Holdings (‘DBS’) is also a top constituent with increased weightage by 50 basis points – from a 0.78% weightage in the parent index to 1.27% in the Climate index. According to its latest sustainability report [5], DBS committed in S$61 billion in sustainable financing loans from 2018 to 2022 in addition to S$24 billion in ESG bonds raised in 2022, where DBS was involved as an active bookrunner. It also noted that it approved S$900 million in unsecured loans to small and medium enterprises across the region to address unmet working capital needs, with more than 98% going to micro and small businesses.

Of the 605 MSCI Asia ex Japan Climate Action Index constituents, its top 10 constituents represent roughly 28% of the total market capitalization, based on total shares in issue of the underlying index as at 31 August 2023.

Note: The Underlying Index is calculated and is updated continuously until the official close of trading on the last relevant Market to close. The Underlying Index is published as end of day values in US dollars. The composition of the Underlying Index is reviewed semi-annually every May and November.

Source: MSCI, as at 31 Aug 2023

[1] Source: https://www.iea.org/reports/world-energy-investment-2023/overview-and-key-findings

[2] Source: https://www.msci.com/documents/10199/32980965/Net-Zero-AssetOwners-Guide.pdf

[3] Prospectus: https://www.blackrock.com/sg/en/products/332845/ishares-msci-asia-ex-japan-climate-action-etf

[4] https://data.alibabagroup.com/ecms-files/1509739361/fcaefa3d-0989-48fb-b003-fa96aa04880e/2023%20Alibaba%20ESG%20Report-Final.pdf?force_isolation=true 

[5] https://www.dbs.com/iwov-resources/images/sustainability/reporting/pdf/web/DBS_SR2022.pdf?pid=sg-group-pweb-sustainability-pdf-dbs-sustainability-report-2022

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