Allan Lane, AlgoChain

UBS looks to dominate the ESG landscape


In his weekly column, Allan Lane, founder of Algo-Chain, writes on the launch of a new ESG equities ETF – the UBS S&P 500 ESG with a TER of 0.12 per cent…

Who would have thought that in 2019 we would still be writing about the launch of a new US equities ETF, in this case UBS's S&P 500 ESG, listed on the LSE with ticker S5SD, with a management fee of 0.12 per cent per year?  Throw in another 0.10 per cent and they will hedge the returns for you into either GBP or EUR.

All credit to UBS who were the first ETF provider to launch a Corporate Bond ETF three years ago, which tracked an ESG ‘compliant’ benchmark index, so these guys have form. With their latest ETF, this looks to screen the S&P 500 stocks using a three-step process.  

First applying the United Nations Global Compact Principles to ensure the selection favours firms with sustainable and socially responsible policies, then firms engaged in the likes of controversial weapons and tobacco are removed, and finally the last step retains only the top 75 per cent of stocks (currently 324) with the highest Company Sustainability scores.

As an investor buying into the ESG story this now feels like a binary decision.  Imagine allocating 40 per cent to the S&P 500 Index and 60 per cent to the new S&P 500 ESG Index, somehow that doesn't reflect the way our brain is wired. Very quickly this could become a key decision point for many of the world's largest pension funds, who must surely choose to go with this S&P 500 ESG. If not, why bother to even enter the discussion? 

UBS's literature assures us that the two indices have the same risk and return characteristics, and indeed tracking error.  The top five constituents include, Microsoft, Apple, Amazon & Facebook, one of which has failed my own ‘Cambridge Analytica’ test.  I am surprised that the corporate governance screening process didn’t throw up some red flags regarding some of Facebook’s practices. The index is described as having a ‘moderate ESG touch’, which probably explains why. It’s worth noting that MSCI’s USA SRI Index, doesn’t include Facebook, which begs the question, what should be the exact criteria for ESG scoring? It would be great to have one common standard, but I guess that will be part of the land grab. 

There’s every reason to believe this new product will become the poster child for those who care about socially responsible investing.  Presumably S&P had no choice, if they hadn’t invented this benchmark, someone else would have filled the vacuum.  It might take some time though, but how long will it take before we all start talking about the S&P 324 ESG Index?

As I look across the industry today, it strikes me that with so much of the eco system embracing all things ESG, we are currently witnessing one the biggest upheavals in a generation.  Most of the focus has been on equities, but as the ESG story rolls into the fixed income space, there is still much to play for.

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