Credit Suisse Asset Management has launched a new equity ETF in Europe that combines a global minimum volatility investment approach with environmental, social, and governance (ESG) criteria.

The ETF provides exposure to companies with strong ESG profiles and weights them in order to produce a low volatility portfolio.

The CSIF IE MSCI World ESG Leaders Minimum Volatility Blue UCITS ETF has listed on SIX Swiss Exchange in US dollars (WDMVO SW) and on Deutsche Börse Xetra in euros (CSY9 GR).

The fund aims to benefit from both the long-term structural shift to socially responsible investments as well as increased current demand for defensive strategies ahead of potential future market turmoil caused by the Covid-19 pandemic.

The fund is linked to the MSCI World ESG Leaders Minimum Volatility Index which is based upon the well-known parent MSCI World Index which covers large- and mid-cap representation across 23 developed market countries.

With over 1,600 constituents, the MSCI World represents roughly 85% of the entire developed market equity universe.

The methodology first harnesses the ‘MSCI ESG Leaders’ approach to select constituents for the index. Using insights from MSCI ESG Research, companies with business activities in the alcohol, tobacco, gambling, nuclear power, and weapons industries, as well as firms that are embroiled in severe ESG-related controversies, are removed from the selection pool.

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 rating process aims to identify ESG leaders and laggards within each industry.

The index selects the securities with the highest ESG scores while targeting a 50% sector representation versus the parent MSCI World Index. Firms with ratings below BB are not eligible for inclusion.

The methodology subsequently harnesses the ‘MSCI Minimum Variance’ approach to weight the selected constituents. This optimization process aims to construct a portfolio with the lowest possible volatility while adhering to certain constraints that limit the deviation of countries, sectors, and individual securities relative to the parent index (in this case, the MSCI World ESG Leaders Index) as well as prevent excessive turnover.

The final index has 240 constituents. The US accounts for the largest country exposure at 58.2%, followed by Japan (12.7%), Canada (7.6%), Switzerland (6.0%), and Hong Kong (2.4%). The largest sector exposures are roughly equally divided between financials (15.2%), consumer staples (14.1%), and information technology (13.0%), followed by communication services (10.2%) and healthcare (9.1%).

The fund comes with an expense ratio of 0.25% which is slightly cheaper than the iShares Edge MSCI World Minimum Volatility ESG UCITS ETF (MVEW GY), unveiled in April, which costs 0.30%. This ETF tracks the MSCI World Minimum Volatility ESG Reduced Carbon Target Index which removes companies operating in disreputable industries from the MSCI World Index before using an optimization process that seeks to minimize volatility, reduce carbon intensity by 30%, and improve the index’s ESG profile by 20%.