UBS has launched a new suite of sustainability-focused equity ETFs which combine the inclusion of broad ESG factors with a targeted low carbon investment approach.

UBS has launched a new suite of sustainable equity ETFs combining broad ESG factors with a targeted low carbon investment approach.

The suite initially comprises four funds linked to MSCI indices providing exposure to US, European, eurozone, and Japanese equity markets.

The funds are listed on SIX Swiss Exchange and Xetra and come with expense ratios ranging between 0.12% and 0.17%.

They are the UBS MSCI USA ESG Universal Low Carbon Select UCITS ETF (USESGA SW; AW1F GY), which comes with an expense ratio of 0.12%; the UBS MSCI Europe ESG Universal Low Carbon Select UCITS ETF (EESGA SW; AW1G GY), expense ratio of 0.12%; the UBS MSCI EMU ESG Universal Low Carbon Select UCITS ETF (EUESG SW; AW1H GY), expense ratio of 0.15%; and the UBS MSCI Japan ESG Universal Low Carbon Select UCITS ETF (JPESG SW; AW1I GY), expense ratio of 0.17%.

Methodology

The ETFs are linked to MSCI ESG Universal Low Carbon Select 5% Issuer Capped Indices which are derived from MSCI’s flagship benchmarks for US (MSCI USA), European (MSCI Europe), eurozone (MSCI EMU), and Japanese (MSCI Japan) equity markets.

Each parent index covers large and mid-cap stocks representing approximately 85% of the total capitalization within its target market.

The methodology first removes companies with operations linked to controversial weapons, civilian firearms, nuclear weapons, tobacco, alcohol, thermal coal power, and fossil fuel extraction.

To factor in a low carbon approach, the parent index constituents are ranked by carbon emissions and the top 5% of securities, by number, are removed while limiting the cumulative weight of securities excluded from any specific sector to less than 30% of that sector’s weight in the parent index.

Additionally, to reduce exposure to companies with high fossil fuel reserves, the parent index constituents are simultaneously ranked by their potential carbon emissions per dollar of market capitalization. The highest-ranked securities are excluded until the remaining cumulative potential carbon emissions are half that of the parent index.

The remaining constituents are then assigned ESG scores, on a seven-point scale from AAA to CCC, which reflect a company’s performance across a broad range of ESG factors relative to sector peers. The score may be adjusted upwards (or downwards) if the company’s ESG performance has improved (deteriorated) since the previous review. Firms with ESG scores in the lowest category (i.e. CCC) are removed from the index.

Constituents are weighted using their market capitalization and an adjustment factor depending on their ESG scores – firms with ESG scores in the second-lowest category (i.e. B) will have their market capitalization weight cut in half, while those with scores in the highest two categories (i.e. AAA and AA) will have their market capitalization weight increased by 50%. The weight of any individual security is capped at 5% to promote diversification.

The indices are reconstituted and rebalanced on a quarterly basis.