As asset owners steadily step up their fiduciary role and implement environmental, social and governance (ESG) strategies, they require benchmarking solutions beyond the traditional market-capitalization-weighted index for their responsible portfolios.
To address this need, STOXX is introducing ESG-compliant versions of 42 flagship benchmarks that meet the standard responsible-investing criteria of leading investors. The new index family follows the successful launch of the STOXX® Europe 600 ESG-X Index, an ESG version of Europe’s most popular benchmark that inaugurated the ESG-X approach in November.
Replicating standard exclusions
The ESG-X indices were developed based on input from European asset owners and incorporate basic norm- and product-based exclusion criteria that aim to limit market and reputational risks while keeping a similar risk-return profile to the respective benchmarks. Companies are removed when ESG data provider Sustainalytics considers they meet at least one of the following:
- are non-compliant with the United Nations Global Compact principles of human and labor rights, the environment and anti-corruption
- are involved in controversial weapons
- are tobacco producers
- derive revenues from thermal coal extraction or exploration
- generate at least a quarter of their power output utilizing thermal coal
The ESG-X family has the ambition to become the benchmark for sustainable investments around the world. The family includes global, regional, country, size and blue-chip indices such as the STOXX® Global 1800 ESG-X Index, STOXX® USA 500 ESG-X Index and EURO STOXX 50® ESG-X Index.
“We were involved in the development of the STOXX Europe 600 ESG-X as we were looking for a tradable European benchmark index that is compliant with our responsible investment policy,” said Magnus Linder, Head of Derivatives at Swedbank Robur, one of Sweden’s largest asset managers. “We are very happy that the ESG-X range is extended with US and global benchmark indices.”
Other indices that are part of the suite are the STOXX® Emerging Markets 800 LO ESG-X Index, STOXX® Developed Markets 2400 ESG-X Index, EURO STOXX® Banks ESG-X Index, STOXX® Asia/Pacific 600 ESG-X Index and STOXX® Japan 600 ESG-X Index. For a full list of ESG-X indices, please visit our dedicated page.
Limiting the cost of responsible policies
Until recently, investors pursuing ESG principles were creating portfolios that diverged from standard benchmarks, leading to tracking error and additional management costs.
The ESG-X indices share their benchmarks’ rules, sector composition and methodology – including the same transparent, free-float market-cap weighting scheme. A STOXX analysis last December found that exclusions as incorporated by the STOXX Europe 600 ESG-X Index had added nearly 23 basis points in annualized returns over the STOXX Europe 600 Index since 2012, while increasing the annualized volatility by 6 basis points: results that don’t diverge from those of the benchmark in a statistically significant way.1
A new market in ESG derivatives
The ESG-X indices are suitable as underlying for mandates, passive funds, exchange-traded funds, structured products and listed derivatives, with the aim to increase liquidity and lower the cost of trading.
Since February, futures contracts on the STOXX Europe 600 ESG-X Index have traded on Eurex to strong investor interest, helping tactical and strategic portfolio uses. The launch of the futures was followed by the introduction of warrants and so-called turbos on the STOXX Europe 600 ESG-X Index, opening up a channel favored by European retail investors.
Sustainable investing is one of the fastest-growing trends in the asset-management industry. STOXX will continue to provide innovative tools for investors to manage their sustainable portfolios in a systematic, transparent, low-cost and liquid way.
1 STOXX Research, ‘STOXX® Europe 600 ESG-X Index – Analyzing ESG Exclusions,’ December 2018.