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Blog Posts — April 3, 2023

Qontigo licenses clean energy thematic indices to Citi

Qontigo has introduced an exclusive series of STOXX indices targeting the clean energy theme and that have risk control and decrement overlays. The indices, which will be licensed to Citigroup as underlyings for structured products, are: 

Spending on green power continues to grow amid thriving demand for renewable energy sources and a price surge in fossil fuels. According to estimates from the International Energy Agency, clean energy investments last year accounted for almost three-quarters of the growth in overall energy investments.1 The sector thus offers investors an opportunity to tap economic growth and meet their sustainability objectives. 

“Events in the last year have catalyzed the transformation of the energy sector towards alternative energy sources and more sustainability,” said Arthur Dorbessan, Global Head of Retail Indices at Citigroup. “We are pleased to partner once again with Qontigo to expand our thematic structured-product offering with access to the clean energy revolution via the ESG-aligned iSTOXX Global Clean Energy Selected 30 Index.” 

New indices

The iSTOXX Global Clean Energy Selected 30 is comprised of 30 companies from developed and CEEMEA2 markets that make at least 20% of sales combined from 140 business activities within the clean energy theme. These include production of wind energy equipment, solar cells, electric vehicles charging stations and biodiesel. The business categorization is based on Revere (RBICS) data. 

ESG filters

Companies in breach of global norms, or those that have a severe controversy rating,3 or are involved in controversial and military weapons, adult entertainment, gambling, oil and gas, nuclear power, thermal coal or tobacco are not eligible for selection. Companies whose trading volume fails to pass a threshold are also removed to ensure index tradability. 

Low volatility, high dividend

In a final selection step, the 50% of stocks with the lowest volatility are kept. From there, the 30 stocks with the highest dividend yield are selected into the index. Low volatility and high dividends are pricing-efficient factors used in structured products. 

Risk control and decrement

Finally, the family includes index versions which apply either an additional risk-control overlay or a decrement on top, or both. In the risk-control strategy, the index methodology has a 10% volatility target. It achieves the target by adjusting its daily exposure to the iSTOXX Global Clean Energy Selected 30 Net Return index4. STOXX has offered risk-control strategies for over a decade, supporting investors who want to manage the risk and try to avoid the worst of market swings.  

In the decrement strategies, a pre-determined annual percentage rate (either 4.5% or 5% in this case), is deducted daily from the parent index’s net-return level on a daily basis — a sort of synthetic dividend detachment.

Decrement strategies are popular among distributors of structured products as they allow better pricing efficiency and competitive terms for their clients. By selling a structure based on a total-return index with a decrement, the issuer eliminates the unpredictability of dividends and is protected against any dividend shortfalls. The investor, in turn, receives improved pricing terms (such as a higher coupon or better capital protection) in exchange for being exposed to the difference between the realized dividends and the decrement.

Innovation through collaboration

With the latest launch, Qontigo has expanded the collaboration with Citigroup in thematic structured products. Other recently introduced thematic strategies include Global Healthcare and risk control versions of the already successful Global Transformation index family. Both parties have also teamed up to introduce single-stock decrement indices.

“The structured-products industry continues to unveil some of the most innovative solutions, meeting the needs and objectives of a sophisticated client base,” said Armelle Loeb, Managing Director, Head of EMEA Index Sales at Qontigo. “The iSTOXX Global Clean Energy Selected 30 suite is testament to the versatility of index-building. We are excited to work together with issuers and come up with rules-based indices that deliver robust and effective methodologies.”

1 IEA, ‘World Energy Investment 2022.’
Central and Eastern Europe, Middle East and Africa.
As measured by Sustainalytics.
Index uses Euro short-term money market rate (€STR).