Fidelity aligns $750m multi-factor bond ETF with Paris Accord

Fidelity International has made changes to the actively managed $750 million Fidelity Sustainable Global Corporate Bond Multifactor UCITS ETF, aligning the fund with the carbon reduction goals of the Paris Agreement.

Fidelity International has aligned its active multi-factor bond ETF with the carbon reduction goals of the Paris Agreement.

While numerous issuers in Europe have launched suites of Paris-aligned ETFs in recent years, the vast majority of these products are focused on equity markets.

Investors may obtain Paris-aligned exposure to investment-grade and high yield euro-denominated corporate bonds through ETFs offered by BlackRock, Amundi, and Tabula IM; however, these funds are passive and, aside from their climate investment credentials, are typically “plain vanilla” in nature.

Fidelity’s move to update its ETF’s strategy delivers a unique proposition to investors – Paris alignment combined with the potential for further outperformance through the firm’s quantitative, multi-factor investment approach.

The fund comprises fixed-rate, investment-grade corporate bonds issued globally. Its security selection process remains largely unchanged and is driven by Fidelity’s proprietary multifactor credit model combined with integrated sustainability criteria. Developed by the firm’s systematic fixed income team, the model seeks to identify bond issuers with the potential for enhanced idiosyncratic returns.

The quantitative process first considers a variety of sentiment, valuation, fundamental, and ESG scores to deliver an overall multifactor score for each bond issuer. It then aims to generate alpha by selecting the most attractive bonds (based on transaction costs and valuation metrics) from those issuers with the highest multifactor scores.

Following the update to the ETF’s investment approach, Fidelity has now incorporated additional screening steps and an optimization weighting approach that are designed to align the fund with the EU’s Paris-Aligned Benchmark (PAB) requirements.

Specifically, issuers that are embroiled in severe ESG-related controversies, are known violators of international norms, are deemed to be having a negative impact on certain UN Sustainable Development Goals, or have business operations linked to weapons, tobacco, thermal coal, and oil & gas are removed.

The remaining issuers are then weighted so as to achieve at least an immediate 50% reduction in weighted average carbon intensity versus the fund’s initial broad-market corporate bond universe as well as a further 7% annual decarbonization going forward, aligning with a trajectory to limit global warming to 1.5°C by 2050.

Due to the ETF’s enhanced sustainability credentials, it has been reclassified from Article 8 to Article 9 under the European Union’s Sustainable Finance Disclosure Regulation (SFDR).

The fund is listed on London Stock Exchange in US dollars (FSMF LN) and pound sterling (FSMG LN), on Xetra in euros (FSCM GY), on SIX Swiss Exchange in US dollars (FSMF SW) and Swiss francs (FSMFCHF SW), and is also available on LSE through a GBP-hedged share class (FSMP LN).

It has an expense ratio of 0.25%.

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