by Qontigo
Lyxor is changing the underlying index of the Lyxor 1 STOXX® Europe 600 UCITS ETF, from the STOXX® Europe 600 Index (Price return) to the STOXX® Europe 600 ESG Broad Market Index (Net return).
The STOXX ESG Broad Market Indices apply a set of compliance, product involvement and ESG performance exclusionary screens until only the 80% top ESG-rated constituents from the starting universe remain. The STOXX Europe 600 ESG Broad Market Index, thus, has 480 components, which are weighted by free-float market capitalization.
Specifically, companies that are non-compliant based on the Sustainalytics Global Standards Screening assessment, or are involved in controversial weapons, tobacco production, thermal coal or military contracting, are not eligible for selection into the STOXX ESG Broad Market Indices. The remaining securities are ranked in descending order of their ESG scores within each of the 11 ICB Industry groups. The STOXX ESG Broad Market Indices select the top-ranking securities in each of the ICB Industries until reaching 80% of the starting index.
The switch comes as more clients demand their investments meet sustainability criteria and European policymakers are regulating which funds can be labelled as having an ESG focus or tilt.
To find out more about the change, we caught up with Arne Scheehl, Head of Product Development & Engineering at Lyxor ETF Germany and Austria.
Arne, what were the reasons for the switch of index in the ETF?
“The big trend for investors in recent years has been ESG. Within it, we see two sub-trends: firstly, clients are switching from conventional investments to ESG ones. In addition, we notice that new investments now tend to have ESG criteria embedded. Further, we see continued strong interest in European equity investments. Therefore, the index switch was a natural choice to evolve the ETF and our product offering more broadly.”
How do the changes impact the overall index portfolio and asset allocation?
“In terms of constituency size, the resulting portfolio is 20% smaller than its benchmark. The STOXX Europe 600 ESG Broad Market Index, as expected, results in a higher ESG score than the benchmark, but investors are also getting an enhanced ESG risk profile from the exclusion of potentially problematic businesses.
“In terms of risk and return, Qontigo’s analysis shows that the ESG Broad Market Index has since 2012 delivered a performance that’s slightly higher than that of the benchmark, while its overall volatility was lower, although not by a significant margin. So we can say that in the long term, index and benchmark do not show a material divergence in risk or returns.
“With regards to sector allocation, the ESG Broad Market Index gains some weight relative to the benchmark on financials, healthcare and telecommunications companies, while underweighting the industrials, basic materials, utilities and energy industries.”
And how does the change affect the ETF classification under the German Association classification (‘Deutsches Verbändekonzept’) and the Sustainable Finance Disclosure Regulation (SFDR) legislation?
“Before the switch, the ETF’s underlying index was a conventional index and as such did not include any ESG considerations. Therefore, the fund was classified as Article 6 under the SFDR regulation. With the new index, the ETF is now an Article 8 fund, which makes it attractive for a broader audience. The index methodology of the new STOXX Europe 600 ESG Broad Market index also follows the German ‘Verbändekonzept’.”
What specific type of investor was the index switch thought for?
“We expect that the new index will be a very attractive investment universe for all European investors seeking exposure to the broad Developed Europe equity market. The index combines three aspects: a) the broad coverage of the European equity market, b) ESG criteria that are in line with both the SFDR regulation as well as the ‘Verbändekonzept’, and c) Qontigo’s very strong brand for equity indices. From our perspective, the index is attractive to all investor types — be it institutions, private banks or retail clients. All of them are increasingly considering sustainable investment criteria in their investment decisions. So, the ETF with the new index is really aiming at all European equity investors.”
Finally, how do you see the market for sustainable investment approaches evolving? Will these become the norm going forward, and eventually replace traditional products?
“Yes, we see a very strong trend towards sustainable investments, and we believe this will be a very long-term move. This trend is a lot more advanced with institutional investors, but we notice that it is rapidly moving towards private banks, financial advisers and retail clients as well. We believe that ESG criteria will be integrated into every investment decision in the future. It will probably take a bit longer for retail investors but for professional investors we see this trend taking place at an astonishing speed.”
