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Socially responsible ETFs Sustainable and forward-looking investments

Socially responsible ETFs

Socially responsible ETFs are investments that align with personal and societal values without sacrificing financial returns. Socially responsible investments (SRIs) are steadily growing in popularity as awareness of the environmental impact of corporate activity increases. SRI ETFs offer investors broad diversification in sustainably managed companies and UBS recognises the importance of acknowledging sustainable management practices.

What are the benefits of socially responsible ETFs in general?

Benefits of socially responsible investment (SRI) ETF are numerous with convenient and flexible access to sustainable investments. Compliance with sustainability criteria is overseen by an established index provider and a modular structure enables coverage of the most important equity regions.

An investment in a sustainable ETF is an investment in our global futures. SRI strategies work to encourage responsible business practices, allocating capital for environmental and social gains across the economy. The investment objective is to replicate the price and return performance of the MSCI Socially Responsible indices. UBS is the first to offer ETFs based on the MSCI Socially Responsible indices.

Clients committed to a straightforward and sustainable investment agenda with a passive investment approach are able to use one globally oriented and three regionally oriented exchange traded funds (ETFs). The investment objective is to replicate the price and return performance of the MSCI Socially Responsible indices. UBS is the first to offer ETFs based on the MSCI Socially Responsible indices.

Your benefits of investing in SRI ETFs at a glance

  • Convenient and flexible access to sustainable investments
  • Modular structure enables coverage of the most important equity regions
  • Exceptional diversification due to the large number of stocks in the index
  • Compliance with sustainability criteria is overseen by an established index provider

Physical index replication means no counterparty risk from swap transactions

Over the past few years, the importance of sustainability and responsible business practices has grown significantly. Markets and companies are now facing new challenges that are not going to go away:

  • Limited resources, 
  • Tighter legislation 
  • Changing consumer behavior 
  • Coincides with heightened public sensitivity to the social and environmental impact of corporate activities.

Corporate integrity and environmental protection are already not just non-profit themes but rather key competitive factors. As such, they offer opportunities for returns. Companies that have come to recognize this potential enjoy competitive advantages. By contrast, companies turning a deaf ear to sustainable management practices are becoming ever less attractive in capital markets, and investors are wary of them.

Which challenges do companies face?

  • Tighter legislation
  • Changed consumer behavior
  • Participation of stakeholder groups
  • New business opportunities
  • Sustainability as competitive advantage

Sustainable investments are becoming more relevant

Recent environmental and natural disasters in particular have alerted us to the dangers and costs of not adequately addressing environmental and safety risks. This in turn has created an awareness for conserving the natural resources of future generations; conservation of these resources can succeed only if economic progress is combined with social justice and environmental protection.

Sustainable investments are becoming increasingly relevant to investors, who are looking to take greater advantage of sustainable trends while attempting to bring their investments into line with their personal values and ethics.

None of this needs to be at the expense of returns. The report "The Performance of Socially Responsible Investment - A Review of Scholarly Studies Published 2008-2010" shows that it is possible to achieve a return with sustainable forms of investment that is similar to that of traditional investment strategies, which is why socially responsible investing (SRI) is enjoying increasing popularity.

Sustainable investing – where to start?

For institutional and private investors alike, building an equity portfolio based on sustainability principles is extremely difficult, because individual stock selection and compliance monitoring of values-based criteria cost time and money.

That's why an investment in MSCI SRI indices offers a viable solution. The indices are based on the established and broadly diversified standard equity indices of MSCI, which is not only one of the world's most renowned index providers but also takes environmental and social risk and opportunity factors into account for its composition.

Returns similar to those of traditional indices

In addition, the report "The Performance of Socially Responsible Investment - A Review of Scholarly Studies Published 2008-2010" has concluded that broadly diversified SRI funds managed against a broad market benchmark and invested primarily in large companies generate risk-adjusted returns similar to those of their traditional counterparts. This is borne out by the performance recorded by various sustainability indices such as the global MSCI ESG indices.

Regional and global

UBS offers ETFs on all of four MSCI Socially Responsible Indices on companies that significantly outperform their peers based on value and sustainability criteria. They cover the global market and various regional markets too.

The indices have a modular structure. The MSCI World Socially Responsible Index is comprised of North America, Europe and the Pacific region. This feature is unique to the MSCI indices.

MSCI World Socially Responsible Index (Emerging Markets)

When compiling values-based indices, both the selection process and criteria are crucial. Companies included in the MSCI SRI indices are screened based on both positive and negative criteria.

Rigorous selection process

MSCI standard indices – selection process

Source: MSCI, UBS AG

Figure: Process pf selecting MSCI socially responsible indices

Independent selection

Selection is carried out independently of UBS by specialized analysts from MSCI, as well as from the equity universe of MSCI standard indices.

Best-in-class principle

Selection is based on the best-in-class principle: From each of the individual sectors of the MSCI standard indices companies are selected with the best sustainability performance.

Certain industries are excluded

Companies that are active in certain industries (e.g. military weapons, nuclear energy) are excluded.

Determination of controversial companies

In addition, investigations are carried out to determine whether a company has been the subject of controversy (e.g. due to poor working conditions), which is likewise included in the evaluation Companies with a rating of 4 or higher on a 10-point scale are excluded as well – irrespective of the ESG rating. The composition of the indices is determined annually; compliance with ESG criteria is reviewed quarterly.

Rating based on ESG criteria

The companies are rated in the areas of environmental, social and governance (ESG) in terms of risks and opportunities and graded on a 7-point scale. Only companies with a minimum rating of good (AAA, AA or A) are included in the index.

Adaptable to each sector / industry

In order to ensure a proper evaluation, the criteria used are adapted to each sector/industry.

Certain products are excluded

Companies that derive a given proportion of total revenues from business activities involving certain products (e.g. alcohol) are also excluded

Companies are assessed quarterly based on a list of criteria in the areas of environmental, social and governance performance (ESG). The best companies in their respective sectors are then included in the MSCI socially responsible indices.

Environmental

Negative and positive environmental impact of production and products

Social

Community and society: impact of operating activities on the local environment
Employees: safety, basic labor rights and discrimination of employees, contractors and suppliers
Customers: marketing practices, product quality and safety performance, as well as potential controversies over unfair business practices.

Governance

corporate governance and management practices, including how ethical principles are applied

Companies whose business activities are not consistent with specific values-based criteria will be excluded from the indices.

Sector/productor/ service

Exclusion criteria

Alcohol

companies classified as a “Producer” that earn either 5% or more revenue or more than $500 million in revenue from alcohol-related products

Gambling

companies classified as involved in “Operations” and “Support” that earn 5% or more in revenue, or more than $500 million in revenue, from gambling-related products

Tobacco

companies classified as a “Producer”, “Distributor”, “Retailer”, and “Supplier” that earn 15% or more in revenue from tobacco-related products

Adult Entertainment

All companies classified as a “Producer” that earn more than 5% in revenue, or more than $500 million in revenue, from this adult entertainment materials

Nuclear power

All companies classified as a nuclear “Utility”
All companies classified as involved in uranium mining, designing nuclear reactors, involved in enrichment of fuel for nuclear reactors, “Supplier” to the nuclear power industry that earn 15% or more in revenue from nuclear-power related products
All companies with 6000 MW or more of installed capacity attributed to nuclear sources or with 50% or more of installed capacity attributed to nuclear sources

Military weapons

companies classified as involved in manufacturing of “Nuclear Weapons”, or “Nuclear Weapons Components”
companies classified as involved in manufacturing of “Chemical and Biological Weapons” or “Chemical and Biological Weapons Components
companies classified as a “Manufacturer of Cluster Bombs”, “Manufacturer of Landmines”, “Manufacturer of Depleted Uranium Weapons”
companies that earn 5% or more in revenue, or more than $500 million in revenue, from manufacturing of Weapons, Weapons Components, and/or Weapons Support Systems and Services

Civilian firearms

companies classified as a “Producer”,“Retailer” that earn 5% or more in revenue, or more than $20 million in revenue, from civilian firearms-related products

Genetically modified organisms (GMO)

Companies that derive any revenue from activities like genetically modifying plants, such as seeds and crops, and other organisms intended for agricultural use or human consumption
Companies that are only involved in GMO Research & Development activities are not excluded

SRI ETFs investing products in focus