UBS, a leading asset manager and exchange-traded fund issuer, has announced the launch of an ethical US corporate bond ETF, the UBS Barclays MSCI US Liquid Corporates Sustainable UCITS ETF. The ETF has been listed on the London Stock Exchange and is available to trade in US dollars (UC97 LN) and pound sterling (UC98 LN).
ESG investing may enhance risk-return profiles compared to broad market indices due to reduced litigation exposure.
The fund is linked to the Barclays MSCI US Liquid Corporates Sustainable TR Index, an index tracking the performance of fixed income bonds issued by US corporates that adhere to strong environmental, social and governance (ESG) standards.
Commenting on the launch, Andrew Walsh, head of UBS ETF Sales UK & Ireland, said: “Demand for ethical investments continues to grow not only in the equities space, but also in fixed income. Our new ETF listing is a reflection of meeting clients’ needs for an easy to access US corporate bond product that tracks an index which screens for companies which have strong ESG profiles. This launch adds to our growing suite of ethical ETFs following the recent listing of the UBS MSCI Japan Socially Responsible UCITS ETF.”
The fund’s reference index was co-developed by Barclay and MSCI, and is part of a family of ESG indices launched in 2013. The index family was designed after extensive consultation with market participants (including asset managers, asset owners, and consultants) to meet the needs of a growing investor base who are integrating ESG themes into their investments 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 construction process initially screens-out firms that produce or promote alcohol, tobacco, gambling, adult entertainment, genetic modifications, or weaponry. It then incorporates an evaluation of current or headline ESG controversies involving issuers in the index, with at-risk firms excluded.
Companies are then further analyzed according to their ESG scores as determined through a proprietary model developed by MSCI, with firms scoring below a rating of BBB excluded. 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 remaining constituents are then weighted relative to the value of debt outstanding.
The index includes only high-quality debt, excluding debt issued by companies with credit ratings below investment grade. The credit mix of the index is currently: Aaa (10%), Aa (14%), A (47%) and Baa (29%). There are currently 428 separate issuers within the index, compared to a starting index universe of 1,073 issuers.
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, especially in light of increasing mainstream awareness, epitomised by the upcoming UN Climate Summit.
The fund has a total expense ratio of 0.20%.