UBS Asset Management is the latest money fund manager to file to launch an ESG Money Fund. The registration filing for UBS Select ESG Prime Institutional Fund says the fund's objective is, "Maximum current income as is consistent with liquidity and preservation of capital while incorporating select environmental, social, and governance criteria ('ESG') into the investment process." UBS's offering, which will also include "Investor" and "Preferred" fund shares, should become the fifth ESG offering, following DWS, BlackRock, SSGA and Morgan Stanley's launches (or filings). (Note: Goldman has a "social" fund and JPMorgan has integrated ESG principles into all of its funds, as have several other managers. See our Oct. 17 News, "Morgan Stanley Latest to Convert MMF to ESG; New DWS European ESG.")

UBS's new preliminary prospectus says, "The fund invests in securities through an underlying master fund, ESG Prime Master Fund.... [The total expense ratio of the Inst fund is 0.18%.] The fund is a money market fund that calculates its net asset value to four decimals (e.g., $1.0000) using market-based pricing. As a result, its share price will fluctuate. The fund seeks to achieve its objective by investing in a diversified portfolio of high quality money market instruments of governmental and private issuers while incorporating fundamental sustainability factors, such as ESG performance of such issuers, into the investment process."

It explains, "Money market instruments may include: short-term obligations of the US government and its agencies and instrumentalities; repurchase agreements; obligations of issuers in the financial services group of industries; commercial paper, other corporate obligations and asset-backed securities; and municipal money market instruments.... In addition, under normal circumstances, the fund invests at least 80% of its net assets (plus the amount of any borrowing for investment purposes), determined at the time of purchase, in securities that meet UBS AM's sustainability criteria. In developing its sustainability criteria, UBS AM draws upon firm-wide resources of the UBS Asset Management Division of UBS Group AG, of which UBS AM is a member."

The filing continues, "UBS AM conducts its own credit analyses of potential investments and portfolio holdings, and relies substantially on a dedicated proprietary credit research team. Embedded in the credit research process is the integration of issuer-level sustainable investing analysis as guided by the UBS Asset Management Division's approach to ESG research and evaluation methodology. The sustainability investing analysis provides a more comprehensive approach to security selection than credit analysis alone as internal and external ESG ratings are applied to evaluate the quality of sustainability practices employed by issuers. Credit analysts rate and maintain internal fundamental credit and ESG ratings, which form the basis for a portfolio construction/optimization approach and focus on issuers that contribute to the fund's ESG profile. UBS AM's portfolio construction process aims to align investments in money market instruments with the concept of sustainability (i.e., the potential for long-term maintenance of environmental, economic and social well-being)."

It tells us, "UBS AM is part of the UBS Asset Management Division of UBS Group AG. The UBS Asset Management Division, at the global level, seeks to be a leader in incorporating sustainability into its management process and honors various commitments in the sustainable investing industry. Active commitments include: Participant in the UN Global Compact since its inception in 2000; Independent assurance of the GRI (Global Reporting Initiative) based sustainability disclosure; UBS Asset Management signatory to Principles for Responsible Investment (PRI); Global Initiative for Sustainability Ratings steering committee; Sustainability Accounting Standards Board; and, The Forum for Sustainable and Responsible Investing."

Discussing "Sustainability factor risk," UBS writes, "Investing primarily in investments that meet ESG criteria carries the risk that the fund may forgo otherwise attractive investment opportunities, or increase or decrease its exposure to certain types of issuers and, therefore, may underperform compared to funds that do not consider ESG factors in the investment process.... The investment objective of UBS Select ESG Prime Institutional Fund is non-fundamental and may be changed by the fund's board at any time without shareholder approval."

They explain, "UBS Select ESG Prime Institutional Fund seeks to achieve its investment objective by investing in a diversified portfolio of high quality money market instruments of governmental and private issuers while incorporating fundamental sustainability factors, such as ESG performance of such issuers, into the investment process. Money market instruments may include short-term obligations of the US government and its instrumentalities; repurchase agreements; obligations of issuers in the financial services group of industries; commercial paper, other corporate obligations and asset-backed securities; and municipal money market instruments. UBS Select ESG Prime Institutional Fund calculates its net asset value to four decimals (e.g., $1.0000) using market based pricing, and its share price will fluctuate."

The filing states, "Under normal circumstances, UBS Select ESG Prime Institutional Fund invests at least 80% of its net assets (plus the amount of any borrowing for investment purposes), determined at the time of purchase, in securities that meet UBS AM's sustainability criteria. In developing its sustainability criteria, UBS AM draws upon firm-wide resources of the UBS Asset Management Division of UBS Group AG, of which UBS AM is a member. UBS Select ESG Prime Institutional Fund's 80% policy is a 'non-fundamental' policy. This means that this investment policy may be changed by the fund's board without shareholder approval. However, UBS Select ESG Prime Institutional Fund has also adopted a policy to provide its shareholders with at least 60 days' prior written notice of any change to the 80% investment policy. UBS Select ESG Prime Institutional Fund will, under normal circumstances, invest more than 25% of its total assets in the financial services group of industries. UBS Select ESG Prime Institutional Fund may, however, invest less than 25% of its total assets in this group of industries as a temporary defensive measure."

They write, "UBS AM conducts its own credit analyses of potential investments and portfolio holdings, and relies substantially on a dedicated proprietary credit research team. Embedded in the credit research process is the integration of issuer-level sustainable investing analysis as guided by the UBS Asset Management Division's approach to ESG research and evaluation methodology. The sustainability analysis provides a more comprehensive approach to security selection than credit analysis alone as internal and external ESG ratings are applied to evaluate the quality of sustainability practices employed by issuers. Credit analysts rate and maintain internal fundamental credit and ESG ratings which form the basis of a portfolio construction/optimization approach, focusing on companies that contribute to meeting the ESG profile for the fund. Portfolio construction focuses on the alignment of a Rule 2a-7 (the regulation governing money market funds) investment discipline with the concept of sustainability -- the potential for long-term maintenance of environmental, economic and social well-being."

UBS adds, "Sustainability criteria includes the fundamental analysis of ESG risks of issuers (that is, the issuers of the money market instruments in which the fund may invest), and evaluating whether, at the time of the fund's investment, such issuers have better than average performance in ESG practices and managing ESG risks. The fundamental analysis of ESG risks may include, but is not limited to, review of the following factors: environmental responsibility; human rights and labor standards; diversity and inclusion in employment; and corporate governance."

They tell us, "UBS AM will employ a negative screening process with regard to security selection for UBS Select ESG Prime Institutional Fund, which will exclude from the fund's portfolio securities or sectors that manufacture products or engage in business activities with a negative social or environmental impact. These may include: controversial weapons; antipersonnel mines; cluster munitions; adult entertainment (5% revenue threshold); tobacco producers (5% revenue threshold); thermal coal (30% revenue threshold); and, generation thermal coal (30% revenue threshold). UBS AM may modify this list of negative screens at any time, without prior shareholder approval or notice."

The prospectus says, "Like all money market funds, each of the funds is subject to maturity, quality, diversification and liquidity requirements pursuant to Rule 2a-7. Each of the funds' investment strategies are designed to comply with these requirements. Each of the funds may invest in high quality, short-term, US dollar-denominated money market instruments paying a fixed, variable or floating interest rate.... Investing primarily in investments that meet ESG criteria carries the risk that UBS Select ESG Prime Institutional Fund may forgo otherwise attractive investment opportunities, or increase or decrease its exposure to certain types of issuers and, therefore, may underperform compared to funds that do not consider ESG factors in the investment process. UBS AM's assessment of an issuer's ESG criteria may change over time, which could cause the fund to hold securities that may no longer meet UBS AM's current ESG criteria."

It warns, "Investing on the basis of ESG criteria is qualitative and subjective by nature and there can be no assurance that the process utilized by any vendors of UBS AM or any judgment exercised by UBS AM will reflect the beliefs or values of any particular investor. In addition, due to constraints imposed by regulations applicable to money market funds or other considerations relating to credit quality, liquidity or yield, the fund may be less able to implement as fully its ESG investment strategy than non-money market funds."

Finally, UBS comments, "Each of UBS Select Prime Institutional Fund and UBS Select ESG Prime Institutional Fund will invest a significant portion of its assets in securities issued by companies in the financial services group of industries, including US banking, non-US banking, broker-dealers, insurance companies, finance companies (e.g., automobile finance) and related asset-backed securities. As a result, each fund's performance will be significantly impacted, both positively and negatively, by developments in the financial services sector, and each fund will be more susceptible to such developments than other funds that do not concentrate their investments."

For more on ESG Money Market Funds, see these Crane Data News articles: BlackRock Launches First Offshore ESG MMF; ICS LEAF in EUR, GBP, USD (7/22/19), Money Fund Assets Up 13th Week Straight; Fitch on ESG in Money Funds (7/19/19), SSGA Goes Live with ESG Money Market Fund; Fitch on Prime MF Flows (7/3/19) and Cap Advisors Group Demystifies ESG Investing; Weekly Portfolio Holdings (6/19/19).

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