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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.
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
- Coincide 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, The Middle East, and the Pacific region. This feature is unique to the MSCI indices.
When compiling values-based indices, both the selection process and the selection criteria are crucial. Companies included in the MSCI SRI indices are screened based on both positive and negative criteria.
Rigorous selection process
Selection is carried out independently of UBS by specialized analysts from MSCI, as well as from the equity universe of MSCI standard indices.
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 included as well. 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.
Negative and positive environmental impact of production and products
Community and society: impact of operating activities on the local environment
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.
Manufacturers that derive 5% or more of their revenues from business activities involving alcohol
Operators and suppliers that derive 5% or more of their revenues from business activities involving gambling
All manufacturers. Retailers, distributors and suppliers that derive 15% or more of their revenues from business activities involving tobacco
Manufacturers that derive 5% or more of their revenues from business activities with erotic content
All companies classified as suppliers that are active in uranium mining or the development of nuclear power reactors All suppliers that derive 5% or more of their revenues from nuclear power-related activities
All manufacturers of nuclear weapons systems or components, biological and chemical weapons systems or components, cluster bombs or land mines. Companies that derive 5% or more of their revenues from business activities involving military weapons
All manufacturers. Retailers that derive 15% or more of their revenues from business activities involving handguns
Genetically modified organisms (GMO)
All companies that derive revenues from genetically modified plants
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
UBS ETFs invest in various asset classes
For example, equities, bonds, commodities, precious metals, hedge funds and real estate, and may therefore be subject to high fluctuations in value. An investment in these funds is therefore only suitable for investors with an investment horizon of at least five years and a corresponding risk tolerance/capacity.
Every fund has specific risks that may increase sharply in unusual market conditions. The net asset value of the fund therefore depends directly on the performance of the underlying index.
Losses are not offset. For more information about the risks, please see the prospectus and the Key Investor Information Documents (KIIDs).
If the currency of a financial product or financial service is not the same as your reference currency then the performance may increase or decrease due to currency fluctuations.
Risks of restricted or increased liquidity in the fund (liquidity risk)
There are risks that may negatively impact the liquidity of the fund. This may result in the fund temporarily or permanently being unable to meet its payment obligations or it temporarily or permanently being unable to fulfill redemption requests from investors. It may occur that the investors would not be able to hold the instrument for the planned holding period and the invested capital or parts thereof may be unavailable indefinitely. If liquidity risks are realized, it may also occur that the net asset value of the fund, and therefore also the unit value, would fall, for example if the company is forced, where legally permissible, to sell assets for the fund at below the market value.
Counterparty risk including credit/receivables risk
There are risks that may arise for the fund as part of a contractual relationship with another party (so-called counterparty). In this respect there is a risk that the contractual party may no longer be able to fulfill its obligations under the contract. These risks may negatively impact the performance of the fund and are therefore detrimental to the unit value and the capital invested by the investor. If the investor sells units in the fund at a time when a counterparty or central clearing counterparty has defaulted and therefore the value of the fund has been negatively impacted, it is possible that the investor may not receive all or any of the money he/she has invested in the fund. As such, the investor could lose some or even all of the capital invested in the fund.
Operational and other risks for the fund
Operational risks refer to risks that may, for example, arise as a result of insufficient internal processes as well as human or system errors at the company or external third parties. In particular, this includes risks resulting from criminal acts, misuse or natural disasters, legal or political risks, changes to tax conditions or custody risks. These risks may negatively impact the performance of the fund and are therefore detrimental to the unit value and the capital invested by the investor. If an investor sells units in the fund at a time when the prices of the assets contained in the fund are lower than when they were acquired, he/she may not receive all or any of the money he/she has invested in the fund. As such, the investor could lose some or even all of the capital invested in the fund.
These risks are not exhaustive. Investments in a product should be made only after careful study of the current prospectus and the current Key Investor Information (KIID). The distribution of this information is permitted only under the conditions provided by applicable law.