DWS has effectively created a new ETF offering socially responsible, low carbon exposure to UK equities.
Simon Klein, Global Head of Passive Sales, DWS.
The Xtrackers MSCI UK ESG UCITS ETF (XASX LN) has come into existence through the repurposing of its FTSE All-Share-linked ETF.
The LSE and Xetra-listed ETF now tracks the MSCI United Kingdom IMI Low Carbon SRI Leaders Select Index, an index designed to represent the performance of UK companies that have lower carbon exposure and higher environmental, social and governance (ESG) profiles compared to the broad market.
The index is based on the universe of stocks that constitutes the parent MSCI United Kingdom IMI, a reference for large, mid, and small-cap securities within the UK equity market.
The methodology independently applies MSCI’s ‘Lowest Carbon Exposure’ and ‘ESG Leaders’ rules to the parent index. Stocks that satisfy both these approaches, and have market capitalizations above £500m, are chosen to form the final index. Constituents are weighted by market cap subject to a limit of 18% on any individual security.
The Lowest Carbon Exposure approach ranks the constituents of the parent index by their carbon emissions per dollar of market capitalization. The highest-ranked companies are excluded until the cumulative carbon emissions of excluded firms reaches 50% of the sum of the total carbon emissions of the parent index. The cumulative weight of companies excluded from any sector is capped at 30% of the weight of that sector in the parent index. In case this limit is reached, no further securities from that sector are excluded.
The ESG Leaders approach, meanwhile, first excludes companies from the parent index that have violated international norms, those that are embroiled in ESG-related controversies, and those that conduct business in controversial industries such as alcohol, tobacco, gambling, nuclear power, weapons, adult entertainment, genetically modified organisms, and thermal coal. The remaining constituents are then assigned an ESG score between AAA and CCC based on the most relevant ESG factors by industry and risk exposure. The approach selects the firms with the highest ESG scores as well as those that have improved their score since the last review while targeting a 50% sector representation versus the parent index.
The final index currently comprises 115 securities compared to 331 in the parent index. Major positions include Unilever (13.0%), AstraZeneca (11.1%), Rio Tinto (5.9%), Reckitt Benckiser (5.1%), Relx (3.7%), Vodafone (3.6%), Prudential (3.3%), National Grid (3.2%), London Stock Exchange Group (2.8%) and Barclays (2.5%). The largest sector exposures are consumer staples (21.0%), financials (20.0%), industrials (12.3%), health care (12.1%), and consumer discretionary (9.6%).
The outgoing FTSE index is an aggregation of the FTSE 100, FTSE 250, and FTSE Small Cap Indexes, reflecting the performance of large-, mid-, and small-cap stocks listed on the London Stock Exchange. The strategy has been retired by DWS owing to persistent low demand in recent years and consistently declining assets. Just prior to conversion, assets stood at $59m, down from a peak of almost $350m in October 2013.
Simon Klein, Global Head of Passive Sales, DWS, commented: “We have seen exceptional flows into ESG exposures this year, and expect that demand to continue into 2021. We have been focused therefore on ensuring our Xtrackers product suite serves the needs of our increasingly ESG-focused investors. This is an important new addition to that product line up.”
The ETF’s expense ratio remains unchanged at 0.18%. This was reduced from 0.20% earlier this month as part of a wide range of fee cuts that benefitted 21 Xtrackers ETPs listed in Europe.
A number of other issuers have introduced UK ESG ETFs in recent months, most notably HSBC, which launched the HSBC UK Sustainable Equity UCITS ETF (HSUK LN) based on the FTSE UK ESG Low Carbon Select Index, and Amundi, which, similar to DWS, repurposed an out-of-favour FTSE-linked product to create the Amundi MSCI UK IMI SRI UCITS ETF (FT1K LN) based on the MSCI UK IMI SRI Filtered Ex Fossil Fuels Index.