DWS is terminating its €70 million ‘ESG-Screened’ European energy sector ETF after changes to the underlying index’s methodology resulted in it falling short of UCITS requirements.
The Xtrackers MSCI Europe Energy ESG Screened UCITS ETF (XSER) debuted in September 2021 alongside an additional nine funds that target individual GICS-defined sectors of the developed European equity market.
Each ETF in the suite tracks an ‘ESG-Screened’ index from MSCI which, historically, excluded violators of UN Global Compact principles, companies associated with controversial, civilian, and nuclear weapons, or tobacco, and firms deriving significant revenue from thermal coal or oil sands extraction.
From 1 March, however, MSCI enhanced its ESG-Screened methodology by also removing companies embroiled in severe ESG-related controversies and firms deriving more than 5% of their revenue from palm oil or arctic oil & gas.
Additionally, each ESG-Screened index now also targets a 30% reduction in total carbon intensity (based on Scope 1, 2, and 3 emissions) relative to its comparable non-ESG-Screened universe. To achieve their lower carbon profiles, the indices remove the companies representing the largest carbon emitters until the target is met.
The majority of DWS’s ESG-Screened sector ETFs have been able to adopt these changes without a hitch; however, according to a shareholder notice issued by DWS, the alterations, if implemented, would cause a significant, undesirable change to XSER’s composition and risk characteristics.
DWS noted: “While the Board of Directors are supportive of changes which enhance the sustainability features of ESG indices in general, in this situation the implementation at the level of the Reference Index would result in the majority of current constituents, which are closely associated with the European energy market, being removed, thereby leaving the Reference Index with an extremely small number of constituents.
“As of the Index Rebalancing Date, the Board of Directors consider that the benchmark will no longer represent an adequate benchmark for the market to which it refers as required under UCITS requirements and would not consider it to be in the best interests of Shareholders to continue to reflect its composition.
While DWS did not indicate how the changes have specifically impacted the index’s composition, the latest factsheet for the end of February showed that it already contained just 11 stocks and needed to apply special weighting rules – by capping the largest stock at 35% and the weight of any other stock at 20% – to adhere to UCITS requirements.
With no suitable alternative index for the ETF, DWS noted that the fund would terminate on 14 March. Until that time, however, the ETF will continue to track the index’s composition prior to the 1 March rebalance in order to prevent investors from suffering unnecessary trading costs.