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DBS launches new tranche of structured product with ESG theme

DBS is launching a new tranche of a structured product that carries an ESG (environmental, social and governance) theme.

MSCI EM Asia Leaders Outperformance Trade is designed to enable investors to profit from the expectation that companies which are best-in-class in terms of ESG will outperform the market.

The follows a successful run of an earlier ESG Outperformance Trade series launched in 2018. Despite a relatively lower awareness of ESG at that time, the series raised S$95 million over seven tranches.

The new structure caps the maturity pay-off at 15 per cent on a cumulative basis. The product has a 36-month tenor. It is available to accredited investors from DBS Private Bank and DBS Treasures Private Client at a minimum investment of US$500,000. The tranche is open until Nov 10.

Said Subhra Chatterjee, DBS Private Bank product management (equities) team lead: "This offering represents DBS Private Bank's confidence in the ESG proposition's potential to ride out market uncertainties and outperform in the long term.

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"By designing it as an outperformance trade, it functions as a pure play on ESG, giving clients exposure to the alpha of ESG investing, while being immune to the beta of the broad market."

In a statement, DBS said it is committed to up the ante on ESG investing "as a purpose driven bank, and helping clients to do good while doing well".

More ESG-themed products are in the pipeline. A recent small-group survey conducted by DBS Private Bank found that 98 per cent of clients have a positive view on ESG investing, and believe it would have benefits such as positive social impact, portfolio diversification, financial outperformance, and resilience to market shocks. There were more than 60 respondents.

Currently, 40 per cent of the respondents had ESG investments. Around 77 per cent aim to raise their ESG investment exposure over the next three to five years, and 70 per cent are willing to switch current portfolio holdings for products with higher ESG ratings.

The new outperformance warrant takes a long position on the MSCI EM Asia ESG Leaders Index while simultaneously going short on the broader MSCI EM Asia Index from which the ESG counterpart is derived.

The MSCI EM Asia ESG Leaders Index has consistently generated an outperformance of roughly 3-4 per cent per annum, compared to the MSCI EM Asia Index over the past decade. This is because the ESG Leaders index has a "quality tilt", thanks to stock selection via an ESG screen. ESG leaders tend to have stronger fundamentals, which should translate into better performance over time.

Based on key metrics as at December 2019, the return on equity for the MSCI EM Asia ESG Leaders Index was 12 per cent, compared to 10 per cent for the MSCI EM Asia Index. The net profit margin was 9 and 7 per cent, respectively.

The structure, called a "capped outperformance warrant", delivers a return if the outperformance is positive, subject to the 15 per cent cap. If the outperformance calculation is negative, the investor receives zero return.

The structure involves payment of a warrant premium of about 6 per cent. This means the worst case scenario is that the investor fails to make back the warrant premium paid, and suffers a loss of 6 per cent.

The first series clocked an average cumulative performance of 14 per cent and an average return on investment of 135 per cent as at Oct 13. Over 75 per cent of clients have unwound their trades to book profits. The series did not feature a cap on the outperformance calculation.

There are a number of risks in the structure, such as market risk which may cause the investor to lose all or a significant portion of the warrant premium. There is also currency risk: the indices are in US dollars but their underlying components may be denominated in other currencies. The exposure occurs when the performance of the underlying components are converted to US dollar in computing the value of the index.

There is also liquidity risk. While the market agent may buy back the warrant, the price may be substantially less than original amount that the investor paid.

Since January, the bank has integrated MSCI ESG ratings into its wealth product suite to help clients make more informed investment decisions.

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