UBS has launched a new exchange-traded fund offering investors access to euro area corporate bonds issued by firms with strong environmental, social, and governance (ESG) characteristics. The UBS Barclays MSCI Euro Area Liquid Corporates Sustainable UCITS ETF (UIMC) is tradable on Deutsche Börse’s Xetra and Frankfurt exchanges.

The Barclays MSCI Euro Area Liquid Corporates Sustainable Index references the performance of investment grade fixed-rate corporate bonds, issued by euro area companies with an MSCI ESG rating of BBB or higher.

The fund tracks the Barclays MSCI Euro Area Liquid Corporates Sustainable Index, co-developed by Barclays and MSCI, and designed to meet the needs of a growing investor base who are integrating ESG themes into their investments. Investors are increasingly turning to ESG-related investment products for ethical reasons and on the premise that incorporating ESG criteria into the index construction process can lead to the identification of companies with better long-term return prospects by avoiding ESG risks. Although there is low correlation between credit and ESG ratings, issuers with high ESG ratings tend to be higher quality, with lower yields and tighter spreads.

The index references the performance of investment grade fixed-rate corporate bonds, issued by euro area companies. To qualify for inclusion in the reference index, companies must be in the industrial, energy supply or financial sector and must have an ESG rating of BBB or higher according to MSCI’s sustainability ratings system.

The methodology underpinning MSCI’s proprietary ESG model initially includes a screen to exclude firms linked to alcohol, gambling, tobacco, weapons, pornography and genetically modified organisms. Companies are then further analyzed according to their ESG scores with only those scoring BBB or higher making the final cut – a firm scores higher on the scale if it has strong employee rights, low levels of corruption, and a strong corporate governance structure. It also ranks well if it does not waste resources, it promotes education, safe-guards animal rights and protects the environment. The final constituents are then weighted relative to the value of debt outstanding with a maximum 5% cap per issuer.

According to Barclays, the ESG approach is beginning to be applied more broadly to fixed income indices and they have seen strong interest in their family of ESG bond indices for both index-linked investment products, such as ETFs, and benchmarks – a trend they expect to continue.

Andrew Walsh, Head of UBS ETFs UK & Ireland, commented: “UBS ETFs recently passed $1 billion in SRI assets under management and is able to offer investors the possibility to build a sustainable worldwide portfolio in an efficient way. A recent study by UBS into SRI investing has shown that there is no negative effect on risk and return compared to portfolios that were not screened for sustainability criteria.”

The ETF has a total expense ratio (TER) of 0.20%.