iShares ESG Aware MSCI USA ETF: ESGU

overall Rating:

1.17

planets

Sam Barrie
3/28/2021
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As people have become more interested and passionate about social justice causes, they want to invest their money in funds that are focused on these aspects. Environmental, Social, and Governance (ESG) is a term often associated with market funds. An ESG fund is one where each of the respective factors (environmental, social, and governance) has been combined into the investment process. There is a set of criteria a fund must meet to be considered ESG friendly. Exchange Traded Funds (ETFs) can be classified ESG friendly if all the holdings meet the set criteria. BlackRock Inc. is an investment management corporation and is the largest asset manager in the world with $8.67 trillion in assets. iShares is a group of ETFs managed by BlackRock. Within the iShares, there is a group of ESG rated funds. ESG rated funds can be tricky as I describe under the ‘How it’s made’ section. The ESGU fund is not fully sustainable due to its different holdings. When looking at other ESG labeled ETFs, it is important to look at the holdings to see if the companies are actually sustainable. The process and criteria for which an ETF can be marked as ESG favorable, needs to be restructured so investors know they are truly investing in environmentally sustainable driven funds.

what it's made of:

0.5

The ESGU exchange traded fund is composed of 347 different holdings with $15.6 billion in assets. The top three holdings with the most weight are Apple (AAPL), Microsoft (MSFT), and Amazon (AMZN) respectively. This already concerns me because Apple is thought to be sustainable by the public but there are several parts of their business that are not, and Amazon also has many of its own issues relating to sustainability. This ETF has a majority of its holdings in information technology, but it ranges in other areas all the way from energy to real estate. Apple holds nearly 6% of the ETF meaning that if this ETF is actually sustainable, then the number one holding better be doing a lot to tackle environmental issues. Apple has committed itself to several environmental goals such as becoming carbon neutral by 2030, but there are several issues I found with the company and their strategies. For one, on their website they discuss using recycled materials for generating new phones. The main tagline says “We’re committed to one day sourcing 100% recycled and renewable materials across all of our products and packaging.” This disheartened me from the start because they can’t even give a target date as to when this transition would be completed by. Using the phrase “one day” shows no real commitments to sustainability. Apple provides a service to their consumers in which they will collect your used items and recycle them to gather materials that can be reused for new iPhones. Well, in 2020 Apple filed a lawsuit against GEEP Canada, a company they hired to destroy and recycle old phones. GEEP Canada apparently found thousands of phones that were still in good condition to be used and sold them for resale. This angered Apple consumers because Apple failed to meet their promise of discarding their phones properly, so now many consumers are looking to alternative sustainable methods of discarding their property. I could continue to speak about Apple’s faulty promises, however, the bottom line is that Apple is not even close to being a truly sustainable company. Looking at Microsoft, I was nervous I would find the same issues Apple is dealing with. However, Microsoft seems to have one of the most robust environmental programs of any technology company. The company has been carbon neutral since 2012 through the purchase of carbon offsets, and they have committed to reaching carbon negativity by 2030. Along with that, the company plans to remove the equivalent amount of carbon they have released since their start in the 1970s by the year 2050. When doing my research, I really could not find any areas in which Microsoft had negative reviews when it came to sustainability. The company seems to be doing much more than other tech companies and they have set the standard high for reducing carbon emissions. One area I still question is, how many of their products are being fully recycled and how many are ending up in landfills. Based on Microsoft’s 2020 Device Sustainability Report (https://aka.ms/devicessustainability), it looks as though Microsoft is still finding ways to deal with their waste. Their products are not fully recyclable meaning many of them still end up in landfills, however, they have set several goals for 2030 regarding recycling and zero-waste. I am confident they have the tools to meet their goals as they met their carbon neutral goal years before any other major tech company. Overall, I think Microsoft is very transparent in their environmental approaches and they generally are sustainable. Amazon is another worrisome company for me. The company is so large that there are bound to be issues regarding their products, supply chain, and overall sustainability. Starting off, Amazon pledged to be carbon neutral by 2040 which is ten years behind Apple. Amazon embellished the fact that their goal is 10 years ahead of the Paris agreement, but a company of their size and influence should be able to push that goal forward. Amazon brought in $23.1 billion in Net Income during 2020 which emphasizes to me, they could be dedicating more resources to climate change. Their company is going to continue to grow which means their environmental impact will also increase. In 2018, the company released 44 million metric tons of CO2 which was more than Apple, Microsoft, FedEx and USPS. Until 2019, Amazon had not released data on their environmental impacts, so when this 2018 statistic was finally reported, it was staggering. Amazon also has many claims against poor working conditions and labour practices. Just like Apple, I could continue to write all the issues Amazon seems to have, but that is inefficient. Once again, Amazon is not yet close to being considered a sustainable company. Of the top three holdings, only Microsoft seems to truly care for the environment. If these are some of the top holdings in the stock, I am concerned for the rest of the holdings. It really makes me question BlackRocks ESG metrics.

how it's made:

1.25

In order for an ETF to be classified as sustainable or ESG focused, it must meet a required set of metrics. The one notable thing about ESG ratings is that they look at risk and not exactly what the companies in their holdings are doing to mitigate climate change. Essentially, BlackRock’s active investors are meant to integrate sustainability-related insights into their normal investing procedure in order to improve long-term risk adjusted returns. This means an ETF could be full of companies that are low risk when it comes to the impacts of climate change in the future, but the companies in the ETF are not necessarily sustainable in terms of reducing global environmental impact. BlackRock looks specifically at investment processes, material insight, and transparency for their ESG integration. This process is disappointing because you then need to look at each individual ETF to determine if the ESG labeling means it is actually sustainable. BlackRocks iShares do provide data such as a fund's carbon footprint, but you need more information than just that to determine if the ETF as a whole is sustainable. You will likely have to do your own research on each ETF to determine its sustainability. The ESGU ETF scored a 6.0 out of 10 on the MSCI ESG Quality Score. This score is calculated based on each individual holding’s score. The ESGU stock is found under the “Go Sustainable” section in iShares. It is labeled as an “ESG Focused Stock.” BlackRock states that ESG Focused Stocks “invest in companies that exhibit positive ESG business practices.” It must not take much for a company to show “positive ESG business practices.” Overall, the ESGU stock is not very sustainable. The process of classifying ETFs as ESG friendly needs improvement.

who makes it:

1.75

iShares are developed by BlackRock, as previously mentioned. BlackRock is one of the most influential and dominating asset management companies in the world. Because of this, it is important to factor in what the company is doing for their employees. BlackRock has several initiatives focusing on diversity and inclusion within the company. Their main philosophy is “we should treat others as they would like to be treated.” This is somewhat of a cliche, but nevertheless, it shows they want employees to be treated with respect. They know not all people want the same things, so they indicate it is important to talk and listen to one another to achieve full inclusion. For the benefit of the employees, BlackRock has created several “employee networks (https://careers.blackrock.com/life-at-blackrock/diversity-equity-and-inclusion#blackrock-founder-scholarshipus)” that focus on different backgrounds, social issues, and perspectives. These networks allow individuals to connect with one another in areas they identify with or are passionate about. Along with this, the company partners with 7 organizations to help in fostering diversity. BlackRock implemented a program called “Driving Better Decisions” which help leaders and managers mitigate bias in the workplace. Their website states that over 2,500 individuals have participated since 2015, but I would like to see a more updated statistic and overview of the program especially after the important social change movements we have witnessed since 2020. It seems that BlackRock hasn’t updated their diversity and inclusion goals recently, as they stated they want 30% female representation in senior management positions by 2020. I would really like to see if they hit this mark and if they plan to improve their goal in the following years. BlackRock is an Equal Opportunity/Affirmative Action Employer and is committed to working with people with disabilities. A majority of companies are committed to these issues, so these two facts don’t necessarily distinguish BlackRock from any other company. BlackRock came under some scrutiny by the Committee of Worker’s Capital (CWC) due to their Stewardship model. In their report (https://workerscapital.org/IMG/pdf/blackrock_cwc_report-09-2020-final.pdf), they say BlackRock has a narrow-mind approach that lacks access to remediation efforts for workers whose human rights were violated. One of BlackRock’s five priorities set in 2017, is Human Capital Management (HCM). The CWC says the policy doesn’t directly “support freedom of association, collective bargaining or the elimination of forced labour.” Along with this, BlackRock has made their commitments to reducing environmental impact clear, however, they have not publicly discussed their efforts to help workers affected by the transition to a low-carbon economy. All this to say, BlackRock needs to be more transparent when it comes to their labor practices and human rights, and they need to clearly define their commitments and intentions to these issues.