HSBC Asset Management has unveiled its first two sustainable fixed income ETFs, the prelude to a more extensive rollout in due course.
Olga de Tapia, Global Head of ETF Sales at HSBC Asset Management.
The new ETFs, which provide access to euro and US dollar corporate bond markets, filter out companies according to a comprehensive set of business activity, environmental, social, and governance (ESG), and carbon intensity screens before tilting towards issuers with overall superior ESG profiles.
The HSBC Bloomberg EUR Corporate Sustainable Bond UCITS ETF (HEUC LN) has commenced trading on the London Stock Exchange in pound sterling, while the HSBC Bloomberg USD Corporate Sustainable Bond UCITS ETF (USD: HUDC LN; GBP: HUSC LN) is set to list on 19 November.
Listings on Borsa Italiana, Euronext Paris, SIX Swiss Exchange and Xetra are also planned.
The funds are linked to the Bloomberg MSCI Euro Corporate SRI Carbon ESG-Weighted Index and Bloomberg Barclays MSCI USD Corporate SRI Carbon ESG-Weighted Index respectively, indices created through a partnership between Bloomberg and MSCI.
The indices’ parent universes are the Bloomberg Euro Aggregate Corporate Index and the Bloomberg US Aggregate Corporate Index. The indices consist of fixed-rate, investment-grade corporate bonds with more than one year remaining until maturity and at least €300 million outstanding for the Euro index or $300m for the US index.
The index construction methodology excludes issuers embroiled in severe ESG-related controversies and those with significant business activities linked to alcohol, tobacco, gambling, adult entertainment, genetically modified organisms, nuclear power, civilian firearms, military weapons, and thermal coal. Firms with carbon emissions above a critical threshold are also removed.
The remaining issuers are assigned sustainability scores from MSCI ESG Research which reflect a company’s ESG performance relative to sector peers. Those with the worst ESG ratings of CCC or B are also excluded.
The remaining securities are provisionally weighted by market value and then adjusted to increase the weights of issuers with better MSCI ESG ratings. Specifically, issuers with ESG ratings in the top three brackets (AAA, AA, and A) have their weights increased by 50%, issuers with ESG ratings of BBB remain unchanged, and issuers with ESG ratings of BB have their weights decreased by 20%.
The weighting methodology also accounts for sector neutrality relative to the parent indices at each monthly rebalance.
According to HSBC, the indices deliver a 40% reduction in carbon emission intensity and an improvement in ESG score of more than 10% (EUR) and 15% (USD) relative to the parent indices.
The funds come with expense ratios of 0.18% and are classified as Article 8 products under the European Union’s Sustainable Finance Disclosure Regulation (SFDR).
Olga de Tapia, Global Head of ETF Sales at HSBC Asset Management, commented: “Demand for sustainable investment products has again grown exponentially this year. Facilitating our clients’ transition to more sustainable low-carbon investments is a clear strategic priority for us. Our new fixed income ETF range takes a step beyond many existing sustainable fixed income ETF products, offering investors a deeper shade of green in their investment portfolios.”
Erin Leonard, Head of Sustainability at HSBC Asset Management, added: “Investors have a key part to play in the global transition to a net-zero economy by allocating capital away from firms with poor ESG practices and pressuring issuers to improve transparency. We’re glad to be able to provide clients with the tools they need to build diverse portfolios with better ESG credentials. These fixed income ETFs are a complementary extension of our existing sustainable equity ETF fund range and an important part of the sustainability solution set for our clients.”