DWS has enhanced the sustainability credentials of four ESG-tailored corporate bond ETFs.
The Paris Agreement seeks to limit global warming to less than 1.5°C above pre-industrial levels.
The four funds include the $1.7 billion Xtrackers II ESG EUR Corporate Bond UCITS ETF, $730 million Xtrackers II ESG EUR Corporate Bond Short Duration UCITS ETF, $120m Xtrackers ESG USD Corporate Bond UCITS ETF, and $70m Xtrackers ESG USD Corporate Bond Short Duration UCITS ETF.
Effective 1 November, the ETFs will switch to new indices that are aligned with the carbon reduction goals of the Paris Agreement, a global accord to limit global warming to less than 1.5°C above pre-industrial levels.
The ETFs’ current indices, which were co-developed by Bloomberg and MSCI, consist of investment-grade, fixed-rate bonds issued in euros or US dollars by corporate entities globally. Eligible issues must have at least €300m or $750m par outstanding.
Two of the ETFs provide broad-maturity exposure by including bonds from across the yield curve, while the remaining two shorter-duration funds target securities with maturities under five years.
All four indices currently contain two ESG-related screening steps.
In the first step, companies with operations linked to alcohol, gambling, tobacco, weapons, pornography, and genetically modified organisms are screened out. In the second step, companies that pass the screening process are assigned scores that indicate a firm’s ability to manage key ESG risks relative to sector peers. Companies scoring average or higher make the final cut.
Securities in the current indices are weighted by the market value of debt outstanding.
The new indices will maintain the same selection methodology but will include additional screening steps and an optimization approach to constituent weighting so as to satisfy the requirements of Paris-Aligned Benchmarks (PAB).
Specifically, issuers that are embroiled in severe ESG-related controversies, are known violators of international norms, are deemed to be having a negative impact on certain UN Sustainable Development Goals, or have business operations linked to thermal coal and oil & gas will also be removed.
The optimization process is then designed to weight the securities so as to achieve at least an immediate 50% reduction in weighted average carbon intensity versus the initial universe as well as a further 7% annual decarbonization going forward.
Due to these enhanced sustainability credentials, the ETFs will be reclassified from Article 8 to Article 9 under the European Union’s Sustainable Finance Disclosure Regulation (SFDR).
They are available across Europe with listings on London Stock Exchange, Xetra, Borsa Italiana, and SIX Swiss Exchange.
Each fund comes with an expense ratio of 0.16%, while euro-hedged share classes for the USD corporate bond ETFs cost 0.21%.
Investors may also obtain Paris-aligned exposure to euro-denominated, investment-grade corporate bonds through ETFs offered by BlackRock or Amundi, while Tabula IM offers a Paris-aligned product focused on the euro-denominated, high yield corporate bond market.
Fidelity International also recently aligned its actively managed, multi-factor global corporate bond ETF with the Paris Agreement.