SUSTAINABLE OPTIONS METHODOLOGY

Overview

The iShares ‘sustainable options’ feature is designed to help investors learn about sustainable iShares ETFs that may help them meet their financial and sustainable investment goals. It highlights the iShares sustainable ETFs that could be considered as ‘sustainable options’ in relation to traditional iShares ETFs. As many factors could influence a decision about which product is best suited for a given investment goal, this information should not be relied upon exclusively when evaluating various investment options.

How ‘sustainable options’ are determined

A ‘sustainable option’ must meet one of the two criteria outlined below. In addition, an internal review helps to ensure only relevant options are displayed.

1. The traditional ETF’s benchmark index and the parent index of the sustainable ETF’s benchmark index are shared

ETFs can be associated based on a shared parent index. 'Parent index' refers to the index from which an ETF benchmark index is derived. A sustainable ETF that shares a parent index with a traditional ETF’s benchmark index is considered a ‘sustainable option’ in relation to the traditional ETF.

Example:

Traditional ETF: iShares MSCI EAFE ETF (Ticker: EFA) and

Sustainable option: iShares ESG Aware MSCI EAFE ETF (Ticker: ESGD)

In this example, the sharing of the MSCI EAFE Index as the traditional ETF’s benchmark index and the parent index of the sustainable ETF’s benchmark index connects the two ETFs.

2. The traditional ETF’s benchmark index and the parent index of the sustainable ETF’s benchmark index have a correlation of above 90%

An association between two ETFs can be established based on the correlation of a traditional ETF’s benchmark index and the parent index of the sustainable ETF’s benchmark index. Correlation is used as it can identify the degree of similarity in the performance and risk profile between two indices. Correlation measures the degree to which two or more things move in relation to one another over a specified period of time (a 1-year period for the purposes of this methodology) in a range of 0-1.0. A higher number means a higher correlation.

Therefore, a parent index of a sustainable ETF’s benchmark index that has a correlation of above 0.9 to a traditional ETF’s benchmark index is considered a ‘sustainable option’ in relation to the traditional ETF.

Example (based on correlation analysis of S&P SmallCap 600 Index and MSCI USA Small Cap Index):

Traditional ETF: iShares Core S&P Small-Cap ETF (Ticker: IJR) and

Sustainable option: iShares ESG Aware MSCI USA Small-Cap ETF (Ticker: ESML)

In this example, the S&P SmallCap 600 Index (IJR’s benchmark index) and MSCI USA Small Cap Index (the parent index of ESML’s benchmark index) have a correlation above 0.9 (based on the most recent calculation period).

The correlation analysis is based on daily performance data over a one year period, as of July 31, 2021. Correlations are recalculated semi-annually for existing ‘sustainable options’ and on an ad hoc basis for new ETF inclusions (qualifying under criteria 2). If a correlation no longer exceeds 0.9, the ‘sustainable option’ association will be removed.

Up to three ‘sustainable options’ can be shown in relation to a single traditional ETF.

Example:

‘iShares Core S&P 500 ETF (Ticker: IVV)’ is associated with three ‘sustainable options’:

  1. iShares ESG Screened S&P 500 ETF (Ticker: XVV)
  2. iShares ESG Aware MSCI USA ETF (Ticker: ESGU)
  3. iShares ESG Advanced MSCI USA ETF (Ticker USXF)

'Traditional ETFs' are ETFs that fall outside of the sustainable product range, an ETF that doesn't have a sustainable strategy as its focus, aka non-sustainable.

'Parent index' refers to the index from which an ETF benchmark index is derived; please see the index provider’s website for further information on how the parent and ETF benchmark indices are constructed.

‘Sustainable options’ will only be shown for traditional ETFs. Not all traditional ETFs will display sustainable options.

‘Sustainable options’ will include sustainable iShares ETFs within ‘Broad ESG’ and ‘ESG Screened’ categories. ETFs in the ‘Broad ESG’ category evaluate companies based on their environmental, social and governance (ESG) business practices to identify risks and opportunities. This includes the iShares ESG Aware, ESG Advanced, ESG Leaders, and ESG Aware Allocation product suites. ETFs in the ‘ESG Screened’ category seek to eliminate certain exposures from your portfolio based on criteria such as business involvement or sector.

‘Sustainable options’ will only be shown for ETFs.