A new STOXX index tracks the Eurozone’s environmental pioneers with an equal-weight approach, combining the benefits of climate sustainability and a diversified portfolio.
The EURO iSTOXX® Environmental 50 Equal Weight Index follows the performance of the 50 EURO STOXX® Index constituents that rank highest in environmental, social and governance (ESG) criteria, placing an emphasis on the first pillar. The index is equal-weighted to provide a more balanced approach to responsible investing.
The index is the latest addition to STOXX’s expanding ESG menu as asset owners and investors increasingly adopt responsible approaches in their portfolios. More than a quarter of the world’s $88 trillion assets under management were invested according to ESG principles as of 2017, according to a report.1
More and more, investors are also combining sustainability-based strategies with alternative weighting schemes to exploit sources of risk premia and diversify from traditional market-capitalization approaches.
Targeting the top ESG scorers
From its universe of stocks, the EURO iSTOXX Environmental 50 Equal Weight Index’s methodology firstly excludes businesses deemed by Sustainalytics2 to be in contravention of United Nations Global Compact principles or involved in controversial-weapons activities. From the remaining companies, those with a Sustainalytics rating model score of at least 50 in each ESG category make it onto the selection list. This creates a high constituency standard with regards to societal and environmental goals.
An environmental tilt
From this selection list, the 100 stocks with the highest free-float market capitalization are selected and ranked in descending order based on their environmental (E) score – which gauges companies’ preparedness for and management of their operations’ environmental impact. The 50 listings with the highest E score will make up the index.
In this way, the index has a bias towards those ESG corporate champions whose initiatives are changing big business’s relationship with the environment.
The equal-weight strategy means many large-capitalization companies get a smaller representation than they do in the benchmark EURO STOXX, whose universe consists of just over 300 liquid stocks.
Underlying for structured product
The EURO iSTOXX Environmental 50 Equal Weight Index, which will underlie a new structured product issued by Morgan Stanley, follows the successful launch last year of the iSTOXX® Europe ESG Climate Awareness Select 50 Index. That index tracks ESG leaders that consider the implications of climate change and that have a low carbon footprint, a high dividend yield and low volatility.
Data show the EURO iSTOXX Environmental 50 Equal Weight Index has outperformed its benchmark by 28 percentage points since data starts in 2012 (Chart 1).
Together with the new index, STOXX has also launched the EURO iSTOXX® Environmental 50 Equal Weight NR Decrement 5% Index, which replicates the performance of the EURO iSTOXX Environmental 50 Equal Weight Index assuming a constant 5% performance deduction per annum.
ESG assets grow, methodologies evolve
As more companies report on their responsible progress and achievements, the availability of this data has enabled its integration into portfolio research and systematic investments. Assets invested in ESG exchange-traded products rose by 30% in 2018 to nearly $23 billion, data from ETFGI show, despite a decline in equity market prices.3
As ESG funds grow and evolve, the investment landscape is changing and helping nurture the path towards a fairer and cleaner world.
- EURO iSTOXX® Environmental 50 Equal Weight Index
- EURO iSTOXX® Environmental 50 Equal Weight NR Decrement 5% Index
- EURO STOXX® Index
- iSTOXX® Europe ESG Climate Awareness Select 50 Index
1 Institutional Investor, ‘McKinsey: ESG No Longer Niche as Assets Soar Globally,’ Oct. 27, 2017.
2 STOXX’s partner Sustainalytics is a global leader in ESG and corporate governance research and ratings.
3 ETFGI, ‘ETFGI reports Environmental, Social, and Governance (ESG) ETFs and ETPS listed globally gather net inflows of US$679 Million during December 2018,’ Press Release, Jan. 31, 2019.