With a growing, wealthier and more urbanized world population, waste is becoming an increasingly dangerous problem with environmental, social and economic consequences.
The World Bank estimates municipal solid waste levels will jump 70% globally in the next 30 years as we dump food, paper and plastic.1 This has potentially devastating effects on air quality, water, lands, as well as on climate, development and personal health.
While the outlook is grim, cities and agencies are reacting to this crisis, and public education about recycling is on the rise. The corporate world and the asset-management industry2 have stepped in in recent years to do their part, too.
New index tracks best waste practices
To target the corporations that are best dealing with their waste footprint, STOXX launched the iSTOXX® Global Responsible Waste Management Select 30 Index on Aug. 28. The index, which also applies standard environmental, social and governance (ESG) principles of investing, is comprised of 30 stocks with low volatility and high dividend yield selected from a pool of companies taking initiatives within their operations towards efficient refuse handling.
The iSTOXX Global Responsible Waste Management Select 30 Index is derived from the STOXX® Global 1800 Index universe and excludes the following:
- Companies in contravention of United Nations Global Compact principles.
- Producers of controversial weapons, small arms and military contracting, gambling, adult entertainment, conventional and unconventional oil & gas,3 thermal coal, nuclear power and tobacco.
- Companies in the Aerospace & Defense sector.
Zoning in on the responsible-waste leaders
A second screening step gives the index its focus on the waste-management leaders. The methodology selects companies that exceed, according to STOXX’s partner Sustainalytics, pre-determined thresholds in the following seven key performance indicators:
- Oil spill disclosure and performance
- Management of mineral waste
- Management of hazardous waste
- Use of recycled material
- Offering of sustainable products and services
- Eco-design (i.e. does the company consider environmental aspects at the research or design stage of its products?)
- Product stewardship programs (i.e. does the company have end-of-life product management programs? Does it take back or recycle products?)
Companies that top these thresholds are sorted within 11 industry groups4 in descending order in terms of dividend yield, and pre-selected in such a way that all industries are represented. From there, the 30 stocks with the lowest volatility are selected into the index, with caps at the industry and country levels. Stocks are weighted based on the inverse of their volatility.
Optimizing structured products’ pricing
The screens of high dividend yield and low price volatility are characteristics that have proven popular with structured-products issuers as they bring down the price of options used to package the securities. They are a staple of the STOXX Select index family, which has recently been expanded with innovative strategies targeting modern and disruptive trends, such as the iSTOXX® Global Cities of Tomorrow Select 30 Index.
Reverse logistics and used parts
Among constituents of the iSTOXX Global Responsible Waste Management Select 30 Index is Deutsche Post AG, the global logistics company that brings back waste from clients it delivers goods to, for processing. There is also Canon Inc., the optical and imaging giant, which collects pre-owned devices and reuses parts in new products.
Passive approach to tackle serious problem
The iSTOXX Global Responsible Waste Management Select 30 Index is the latest addition to a growing body of indices following responsible strategies. The index also aims to capture a specific and growing thematic trend tied to urban development and environmental progress.
It is also a good example of how a systematic passive approach can combine sustainable investing with a thematic dynamic and additional equity fundamental criteria, potentially enhancing returns or fulfilling desired strategies. With a waste-management focus, the index also helps investors fight a serious menace for our world.
1 The World Bank, ‘What a Waste: An Updated Look into the Future of Solid Waste Management,’ Sep. 20, 2018.
2 See Plastic Solutions Investor Alliance.
3 Unconventional oil & gas includesarctic oil and gas exploration, oil sands and shale energy.
4 Industry Classification Benchmark industries.