Include an innovative light-ESG screening to your core allocation

An enhanced ESG Universal approach with UBS ETF

In recent years, the concept of minimum ESG requirements has evolved, with additional business activity exclusions and climate considerations becoming the new norm. Conscious of this shift, UBS developed together with MSCI the ESG Universal Low Carbon Select family, a set of customized indices that aim to maintain the core-replacement feature of the ESG Universal approach while expanding the exclusion criteria in order to enhance its ESG characteristics and reduce its carbon footprint.

Starting from a core exposure, we first exclude the “highest carbon emitters”, which are identified as the worst 5% securities (by number) in terms of carbon intensity and potential emissions. In a second step, we perform some basic exclusions in line with the standard MSCI ESG Universal methodology, removing companies that are flagged as violators of the United Nations Global Compact Principles or have involvement in controversial weapons. Market participants are now considering a broader set of business involvement exclusions as essential, hence we have redefined the notion of baseline exclusions in order to remove also companies that are deriving revenues from activities such as Nuclear Weapons, Civilian Firearms, Tobacco, Thermal Coal and Fossil Fuel Extractions (e.g. oil sands, shale oil and artic drilling). In the fourth and last step, the remaining companies are weighted by a combination of market capitalization, ESG Rating and ESG Trend, which over- or underweights companies depending on their ESG performance.

Through this custom methodology, the MSCI ESG Universal Low Carbon Select indexes achieve all their sustainability objectives in terms of ESG improvements and carbon footprint reduction while maintaining a broad and diversified investment universe.

Source: MSCI, UBS Asset Management

Thanks to his custom methodology, the MSCI ESG Universal Low Carbon Select indexes achieve all their sustainability objectives in terms of ESG improvements and carbon footprint reduction while maintaining a broad and diversified investment universe. Taking MSCI ACWI as an example we can see how, from a performance perspective, MSCI ACWI ESG Universal Low Carbon Select Index had a better performance compared to the parent MSCI ACWI over the past 5 years. The outperformance became particularly noticeable in late 2019, and increased throughout 2020 following the Covid-19 outbreak. It is interesting to note that those excess return have been achieved with lower volatility (i.e. better risk-return profile) and a low tracking error of 89bps p.a. in the last 5 years.

These findings confirm how the portfolio fulfills the objective of having returns that are comparable to those of the parent benchmark.