Investing along sustainability principles has become the default position for many asset owners and investors, prompted by client demand, risk management and regulatory pressure. According to estimates, assets managed under environmental, social and governance (ESG) strategies have topped 30 trillion dollars, more than doubling in value in five years.1
Along this growth pattern, Qontigo’s STOXX index unit has built up an ESG ecosystem that aims to support investors with their particular needs and expectations around sustainability. This ecosystem is made up of a comprehensive range of solutions that meet specific and diverse goals.
ESG means many things
ESG refers to non-financial factors incorporated in investment processes to identify potential material risks and growth opportunities with a focus on sustainability. These factors are varied, and each investor can approach them in multiple ways depending on the objective of the investment. As a result, the ESG world is vast and can mean many things; so it’s best to explore it with a framework.
Attaining ESG targets, hedging risks and targeting opportunities
At the heart of Qontigo’s ESG ecosystem are three main categories of indices, each reflecting different strategies and degrees of ESG penetration and impact. Together, they were designed to categorize all levels of investor objectives and market uptake.
Qontigo’s 3 ESG Categories
|Exclusion||Inclusion||Sustainable Responsible Investment|
|STOXX ESG-X Indices|
80 indices covering regional, country, blue-chip and facor-based strategies
|EURO STOXX 50® ESG|
DAX® 50 ESG
ESG-X: the right place to start
ESG-X indices reflect the popular strategy of negative exclusions, applied on flagship benchmarks. Their norm- and product-based screenings are based on standard policies of leading asset owners and allow the ESG-X Indices to keep a similar financial risk and return profile to benchmarks, while reducing ESG-specific risks. The filters exclude companies that are non-compliant with Sustainalytics’ Global Standards Screening, or are involved in controversial weapons, tobacco, or thermal coal production or consumption.
With the ESG-X indices, investors can construct highly liquid portfolios accessible through exchange-traded derivatives,2 and avoid the risks associated with contentious activities without impacting returns in a material way.
ESG indices: from exclusion to active integration strategies
Next up, our growing family of ESG indices combine negative exclusions with the positive integration of ESG parameters into stock selection. The indices select or overweight companies with the highest ESG scores within some of the world’s most iconic benchmarks, while underweighting the laggards.
Part of this family, the EURO STOXX 50® ESG Index is an ESG version of the well-known EURO STOXX 50® Index. The EURO STOXX 50 ESG excludes the 10% least sustainable components from the benchmark based on Sustainalytics’ ESG scoring, as well as companies in controversial activities, in favor of more sustainable peers from the same supersector.
For its part, the DAX® 50 ESG Index tracks the performance of the 50 largest, most liquid German stocks that have comparably good performance based on ESG criteria. The stocks must also pass a screening for global norms, and not be involved in controversial weapons, tobacco production, thermal coal, nuclear power or military contracting. The DAX 50 ESG is derived from the HDAX® Index, which comprises the entire set of companies included in DAX®, MDAX® and TecDAX® indices.
SRI: the next level in sustainable investing
Our upcoming SRI solutions make up the third main ESG index pillar for Qontigo. These will take sustainable investing to an even more focused level, where ESG key performance indicators (KPIs) guide allocation — assuring maximum impact investing. The indices will combine negative and positive screenings, and favor company characteristics that actively contribute to specific sustainability goals. SRI portfolios provide more concentration and distinct risk-return characteristics from those of traditional benchmarks.
Visit this blog in coming days as we delve deeper into the characteristics of each one of these three ESG index clusters.
Methodologies with objectivity and replicability in mind
Qontigo’s ESG index products are designed for easy adoption for many types of investors, and come to replace costly customized alternatives that are often less liquid. ESG portfolios also need financial products growing alongside, pushing boundaries in innovation and access.
To fulfill that philosophy and ensure their efficacy, all indices in the ESG family are guided by the following key design criteria:
● Transparency & simplicity: a clear and easy-to-explain, rules-based framework to incorporate ESG considerations into investment processes.
● Liquidity & tradability: liquidity considerations always play a crucial role in the development and composition of indices.
● Best-in-class data quality: STOXX uses a strategic open-architecture framework that leverages the leading third-party data and transforms qualitative objectives into quantifiable results.
● Ongoing alignment with changing investor preferences: ESG ratings are driven by product focus, and corporate governance and actions, which can change over time; we’ve built in a rapid re-alignment methodology that allows the fast exit of a company from an index in just two business days.
Qontigo’s ESG ecosystem is completed by four stand-alone index families:
- STOXX ESG Leaders Indices: made up of best-in-class stocks in terms of E, S and G criteria based on indicators that help determine the positioning of companies in each category.
- STOXX Industry Neutral ESG Indices: they target the highest-ranked stocks in terms of E, S and G while limiting sector biases.
- Low Carbon Indices: they aim to significantly decrease the carbon footprint relative to liquid benchmarks, employing a transparent scheme based on carbon intensity scores that determine the over- and under-weighting of stocks.
- Climate Benchmarks (coming soon): versions of flagship STOXX indices that comply with, and exceed, the requirements laid out in the new European Union regulation establishing Climate Transition Benchmarks (CTBs) and Paris-aligned Benchmarks (PABs).
These four groups of indices further expand the possibilities for investors, allowing them to address individual priorities and express opportunity views with flexibility, accuracy and transparency.
The sustainability journey
With a track record that dates back to 2001, STOXX advocates sustainability as a company (we have been a signatory of the UN’s Principles for Responsible Investment since 2012) and in our products.
By offering clear and rules-based methodologies, Qontigo’s ESG indices aim to offer each investor the right solution for their needs. Other than for benchmarking, many of these indices are widely used as underlyings for exchange-traded products and listed derivatives, helping lower the cost of trading and enhance the liquidity of portfolios. They also underlie structured products and certificates. This highlights the transformation in ESG investing from recent years, when investing along responsible lines usually meant increasing tracking error and fees, and sacrificing liquidity.
ESG is a very broad topic. It covers a wide spectrum of practices and potential applications that vary from market to market, and indeed from investor to investor. Our ESG ecosystem is structured as a path where each station brings a different level of sustainability engagement. It’s up to investors how they embark on their journey, how fast they travel and where they stop. Qontigo is excited to accompany them in this stimulating trajectory.
1 Global assets according to Global Sustainable Investment Alliance (GSIA) data at the end of 2017.
2 For example, futures on the STOXX® Europe 600 ESG-X Index and STOXX® USA 500 ESG-X Index are listed on Eurex.