Blog Posts — December 16, 2021

Germany’s LBBW licenses DAX 50 ESG decrement index for structured products

Germany’s Landesbank Baden-Württemberg (LBBW) has licensed the idDAX 50 ESG NR Decrement 4.0% Index, derived from the DAX® 50 ESG Index, to issue structured products with efficient exposure to sustainability leaders in the German equity market.  

The idDAX 50 ESG NR Decrement 4.0% Index replicates the performance of the DAX 50 ESG NR Index assuming a constant markdown of 4% per annum, accruing on a daily basis. NR (net return) indices include all dividends paid by constituent companies, after tax. The ‘id’ suffix in the name denotes a DAX index that has been designed or customized specially for one client’s use.  

German sustainability benchmark

The DAX 50 ESG Index is a broad-market ESG benchmark for German equities that extends beyond the DAX, designed for the growing pool of investors embracing sustainable principles. Selection of the 50 constituents from the HDAX® Index universe1 is based on ranking by market capitalization and ESG score.

The index employs two complementary sustainability approaches: exclusionary screens for controversial or unsustainable activities2, and positive screening based on ESG scores. Both criteria are provided by Sustainalytics. 

“Sustainability is an integral part of LBBW’s corporate strategy and business policies, and is core to the product suite we seek to offer clients. Investors in Germany have grown increasingly aware of the real-world impact that comes with investing responsibly. In this sense, we are excited we will soon be offering our first structured ESG products covering the German stock market, following popular products covering the European and global markets, and expanding our broader sustainability menu.”

Jan Krüger, Head of Equity Markets at LBBW

In 2019 LBBW became the first German universal bank to sign the Principles for Responsible Banking (PRI).

Inflows to ESG

Germany has been described as a global showcase for ESG adoption, helped by penetration of sustainability-focused products and the drivers of European regulation and national political ambition. Structured products have been the vehicle of choice for many retail investors, in Germany and beyond, targeting ESG strategies. A total of $4.6 billion was invested in index-based, ESG-focused structured products in the first six months of this year, according to data provider Structured Retail Products. That compares with $6.6 billion for all of 2020. 

Innovation in structured products

The structured-products industry has in recent years responded to increasing investor demand, implementing new strategies and employing customized and sophisticated underlying indices. With record-low interest rates, however, terms offered by structured products have lost some appeal. Additionally, dividends paid by the underlying indices, which enable issuers to improve terms, proved to be volatile during the 2020 pandemic.3 All this has forced issuers to search for new ways and indices that can offer cheaper optionality to clients. 

A better value proposition 

Traditionally, structured-product investors are exposed to the price returns of the underlying through so-called synthetic replication. Any dividends paid during the lifetime of the structured product go to the issuer, who holds the underlying assets as a hedge. The expected value of these dividends is embedded into the pricing of the product, increasing investor benefits such as a higher coupon or better capital protection. 

The decrement mechanism helps issuers hedge dividend risk. It involves deducting a pre-determined amount in absolute or percentage terms from the underlying’s level or total return on a daily basis. By selling a structured product based on a total-return index with a decrement, the issuer is protected against any dividend shortfalls. The investor, in turn, receives better pricing terms in exchange for being exposed to the realized dividends.

“This new index marries Qontigo’s strong index capabilities and LBWW’s long-standing expertise as issuer of retail financial products. It is another example of how we can partner up with clients to build customized and rules-based solutions that are efficient for end investors. We are excited about this collaborative effort that increases innovation and improves the options for investors in the structured-products market.” 

Serkan Batir, Managing Director DAX at Qontigo

1 The HDAX universe comprises the joint set of companies included in DAX, MDAX® and TecDAX®
2 Negative exclusions in the DAX 50 ESG Index are determined by Sustainalytics and cover a Global Standards Screening as well as involvement in controversial weapons, tobacco production, thermal coal, nuclear power and military contracting. 
3 According to the Janus Henderson Global Dividend Index, the value of European dividends tumbled 32% in 2020 from 2019 as companies were forced to slash payments in the face of the COVID-19 induced economic slump.