UBS Asset Management has unveiled the UBS Climate Aware Global Developed Equity CTB UCITS ETF, the first in a new line of ‘Climate Aware’ ETFs focused on delivering low carbon exposures.

Barry Gill, Head of Investments, UBS Asset Management.

The fund has listed on SIX Swiss Exchange (CLIMA SW) in US dollars and is expected to roll out other major European exchanges, including Xetra and Borsa Italiana, in the near future.

UBS is the second largest provider of environmental, social, and governance ETFs in Europe with an extensive product roster that accounts for around 20% of ESG-related ETF assets on the continent.

Until now, the issuer has primarily developed funds that deliver an enhanced ESG profile through balanced exposure to environmental, social, and governance risk factors.

The new offering, however, homes in on the environmental aspect of ESG investing, providing a solution that is specifically aligned with the transition to a low carbon economy.

Recent research from Cerulli Associates, which identified a groundswell of support for ETFs that eliminate exposure to fossil fuels or minimize a portfolio’s carbon intensity, suggests the strategy is likely to find favour with investors.

Methodology

The fund tracks the Solactive UBS Climate Aware Global Developed Equity CTB Index which integrates UBS’s Climate Aware framework within a universe of large and mid-cap developed market equities to remove companies with the greatest climate-related risks and tilt towards firms with best-in-class climate metrics.

The methodology first filters out companies in violation of United Nations Global Compact principles, firms that are involved in tobacco, controversial weapons, and military armaments, and those that are exposed to production and energy generation from thermal coal and oil sands.

Each remaining company is assigned a ‘Climate Score’, derived from six individual climate-related metrics, which captures its climate risks relative to others within the same industry.

There are three risk-reducing metrics that negatively penalize securities based on CO2 intensity, energy production, and fossil fuel reserves; two opportunity-seeking metrics that positively favour securities based on renewable energy investment and projected alignment with a climate scenario; and one physical risk metric that captures the potential business impact arising from severe weather caused by climate change.

Firms with Climate Scores that rank in the bottom 30% of their industry, considered climate laggards, are removed from the index, while companies with the highest climate scores, considered climate leaders, have their market capitalization weight increased by a factor of 130%.

The methodology then utilizes an optimization process on the tilted portfolio to ensure the index complies with the requirements for EU Climate Transition Benchmarks while also minimizing country, industry, and company deviations compared to the parent universe.

Specifically, the index targets an immediate reduction in carbon intensity of at least 30% and an overall boost to the ESG profile of more than 10%. Additionally, the index ensures an ongoing decarbonization trajectory of 7% per annum at future rebalancing dates.

According to UBS, the resulting index actually achieves a 41% reduction in carbon intensity and a reduction of potential future emissions of 92% relative to its parent index. This aligns the index with a temperature increase of 1.8°C by 2050, satisfying the goal set out in the Paris Agreement to constrain the rise in global temperatures to 2°C above pre-industrial levels.

The strict climate-aware methodology means the ETF is classified as an Article 9 product under the EU’s Sustainable Finance Disclosure Regulation (SFDR).

The fund comes with an expense ratio of 0.19%.

Alignment with 2°C 

Barry Gill, Head of Investments, UBS Asset Management, said: “Investors are growing more aware of the effects climate is having on their portfolios. By providing innovative products, such as the Climate Aware ETF, we can enable clients to align their investments with their de-carbonization goals. Our Climate Aware approach is underpinned by our active stewardship program. With a consistent methodology, and growing the pool of assets invested using this framework, we can drive further positive change on behalf of our clients.”

Timo Pfeiffer, Chief Markets Officer at Solactive, added: “Climate-aware investing is one of investors’ most significant criteria when choosing their investments, and, through political and public initiatives, its importance will grow steadily. With UBS’s new Climate Aware ETF, investors obtain an effective tool to meet their climate and decarbonization goals. With its 1.8°C target, the ETF operates under the 2°C threshold, making it not only future-proof but also a viable investment opportunity contributing to a greener future.”