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Blog Posts — March 20, 2023

Paris-aligned STOXX indices licensed to four German states for multi-billion ‘dark green’ pension mandate

Qontigo has introduced the STOXX ESG Länder PAB (Paris-aligned Benchmark) indices, to be licensed to four German federal states as underlyings for a multi-billion pension mandate.  

The two equity indices will be passively replicated by the public pension funds of Baden-Württemberg, Brandenburg, Hesse and North Rhine-Westphalia, which are shifting from previous STOXX low-carbon indices amid new sustainability legislation. The four states plan to allocate as much as 11 billion euros to the indices. 

PABs follow thorough climate requirements embedded in the European Benchmark Regulation framework, and are designed to facilitate the shift in investments towards a low-carbon economy and the goals of the Paris Climate Agreement. The STOXX ESG Länder PAB indices additionally incorporate more stringent criteria in their methodology. 

The licensed indices have, respectively, a global and a Eurozone market focus. 

Baden-Württemberg is adopting a new Sustainable Financial Investments Act that incorporates sustainability as a fourth criterion of state investments (on par with profitability, liquidity and safety) and establishes the UN’s Sustainable Development Goals (SDGs), EU Taxonomy and the Paris Agreement as the basis for portfolio decisions by the state, agencies and state-run companies.1 The state acts as project manager in this initiative for the group of four. 

“We are very glad that we could find consensus with our colleagues in Brandenburg, Hesse and North Rhine-Westphalia to jointly implement a new methodology that incorporates the 1.5-degree target of the Paris agreement and exclusions for activities with significant harm to EU taxonomy objectives or one of the UN sustainable development goals,” said Dr. Danyal Bayaz, Minister of Finance in Baden-Württemberg.

Qontigo’s collaboration with the four pension funds dates back to 2019, when STOXX won a request for proposal to license four low-carbon indices

PAB regulation

The STOXX PAB indices help investors reduce exposure to climate-related financial risks, and allow for increased allocations to companies well positioned to capture opportunities in the transition to a low-carbon economy. They are also useful stewardship and corporate engagement tools. 

The PABs are designed so that the portfolio shows a 50% reduction in greenhouse gas emissions intensity relative to a benchmark and decarbonize further every year. They are also exposed to sectors with high impact on climate change. The indices tilt towards companies committed to the Science Based Targets initiative (SBTi) or that have an approved target will be eligible.

Companies identified as non-compliant based on Sustainalytics’ Global Standards Screening assessment are excluded, as are those involved in activities deemed undesirable from a sustainability standpoint. Additionally, STOXX will exclude companies that Sustainalytics identifies to be involved in a severe controversy. The weights of index components are determined through an optimization process that employs the Axioma Portfolio Optimization software. 

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Additional criteria

The STOXX ESG Länder PAB indices additionally exclude companies if they significantly obstruct any of the 17 UN SDGs. Finally, they avoid ESG laggards and the most polluting companies by applying a best-in-class approach on ESG scores and a carbon risk metric.

Germany ranks high globally in its efforts to combat climate change and to improve ESG standards among companies. Responsible objectives are underpinned by local and regional regulation, as well as strong consumer and investor demand. 

“We are showing how sustainable investments are possible and that the public sector can and should be a role model and driving force here,” said Michael Boddenberg, Minister of Finance in Hesse. “With the new Climate Plan Hesse, the Hessian government has just shown a path on which Hesse can become climate neutral by 2045 at the latest. An important step in following this path are sustainable capital investments.”

See Simmons & Simmons, ‘Germany – upcoming Sustainable Financial Investments Act.’

Qontigo is a leading global provider of innovative index, analytics and risk solutions that optimize investment impact. As the shift toward sustainable investing accelerates, Qontigo enables its clients—financial-products issuers, asset owners and asset managers—to deliver sophisticated and targeted solutions at scale to meet the increasingly demanding and unique sustainability goals of investors worldwide.

Qontigo’s solutions are enhanced by both our collaborative, customer-centric culture, which allows us to create tailored solutions for our clients, and our open architecture and modern technology that efficiently integrate with our clients’ processes.

Part of the Deutsche Börse Group, Qontigo was created in 2019 through the combination of Axioma, DAX and STOXX. Headquartered in Eschborn, Germany, Qontigo’s global presence includes offices in New York, London, Zug and Hong Kong.